Small Business Size Regulations, Small Business Innovation Research (SBIR) Program and Small Business Technology Transfer (STTR) Program, 76215-76227 [2012-30809]

Agencies

• SMALL BUSINESS ADMINISTRATION

[Federal Register Volume 77, Number 248 (Thursday, December 27, 2012)]
[Rules and Regulations]
[Pages 76215-76227]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-30809]


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SMALL BUSINESS ADMINISTRATION

13 CFR Part 121

RIN 3245-AG46


Small Business Size Regulations, Small Business Innovation 
Research (SBIR) Program and Small Business Technology Transfer (STTR) 
Program

AGENCY: Small Business Administration.

ACTION: Final rule.

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SUMMARY: The U.S. Small Business Administration (SBA) has amended its 
regulations governing size and eligibility for the Small Business 
Innovation Research (SBIR) and Small Business Technology Transfer 
(STTR) programs. This rule implements provisions of the National 
Defense Authorization Act for Fiscal Year 2012. The rule addresses 
ownership, control and affiliation for participants in the SBIR and 
STTR programs. This includes participants that are majority-owned by 
multiple venture capital operating companies, private equity firms or 
hedge funds.

DATES: This rule is effective January 28, 2013.

FOR FURTHER INFORMATION CONTACT: Carl Jordan, Office of Size Standards, 
at (202) 205-6618, or Edsel Brown, Assistant Director, Office of 
Technology, at (202) 205-7343. You may also email questions to 
sizestandards@SBA.gov.

SUPPLEMENTARY INFORMATION: 

I. Background

    On May 15, 2012, at 77 FR 28520 (available at https://www.gpo.gov/fdsys/pkg/FR-2012-05-15/pdf/2012-11586.pdf), the U.S. Small Business 
Administration (SBA or Agency) published a proposed rule to implement 
provisions in the National Defense Authorization Act for Fiscal Year 
2012 (Defense Authorization Act), Public Law 112-81, which affected the 
SBIR and STTR programs. Specifically, section 5001, Division E of the 
Defense Authorization Act contained the SBIR/STTR Reauthorization Act 
of 2011 (SBIR/STTR Reauthorization Act), which set forth several 
provisions relating to businesses majority-owned by venture capital 
operating companies (VCOCs), hedge funds or private equity firms and 
provided that such businesses may participate in the SBIR program, 
under certain conditions.
    The SBIR/STTR Reauthorization Act provided a short timeframe for 
SBA to issue a proposed rule. Therefore, the Agency could not conduct 
public outreach prior to drafting and issuing the proposed rule. 
However, in addition to soliciting public comments, SBA conducted 
several public outreach sessions following publication of the proposed 
rule, which were coordinated by SBA's Office of Advocacy. 77 FR 30227 
(May 22, 2012). SBA held these outreach sessions in Washington, DC; 
Boston, Massachusetts; Austin, Texas; and New Orleans, Louisiana. In 
addition, SBA held an online webinar.
    SBA received over 250 comments in response to the proposed rule. 
The comments relating to specific sections of the rule are discussed in 
further detail below.

II. Summary of and Response to Comments

A. Section 121.701--Definitions and Programs Subject to Size 
Determinations

    In Sec.  121.701, SBA proposed to make it clear that the size and 
ownership/control regulations apply to both the SBIR and STTR programs. 
In addition,

[[Page 76216]]

SBA proposed several definitions applicable to the programs, and set 
forth in statute, to this section.
    Specifically, SBA proposed definitions for the terms ``VCOC,'' 
``hedge fund,'' and ``private equity firm.'' The proposed definitions 
are verbatim from the SBIR/STTR Reauthorization Act, which defined 
those terms. SBA received no comments on these definitions.
    SBA had also proposed to define the term ``portfolio company'' 
because the SBIR/STTR Reauthorization Act uses that term when referring 
to VCOCs, hedge funds and private equity firms, but does not define it. 
SBA proposed to define the term ``portfolio company'' to mean any 
company owned by the VCOC, hedge fund or private equity firm. SBA 
received only one comment on the definition of ``portfolio company.'' 
The one comment supported SBA's definition and agreed that it is 
simpler and easier to understand than the Department of Labor 
regulation reviewed by SBA. Therefore, SBA has adopted the proposed 
definition of the term ``portfolio company'' as final in this rule.
    SBA also proposed a definition for the term ``domestic business 
concern.'' That issue is addressed in the next section concerning 
ownership and control of the SBIR/STTR awardee.

B. Section 121.702--Ownership and Control--General

    In this section, SBA proposed amendments to the ownership and 
control of SBIR and STTR participants. At the time SBA issued the 
proposed rule, SBA's existing regulations stated that an SBIR awardee 
must be a business concern that is at least 51% owned and controlled by 
U.S. citizens or permanent resident aliens, or a business concern that 
is at least 51% owned and controlled by another business that is at 
least 51% owned and controlled by U.S. citizens or permanent resident 
aliens. SBA considered retaining this ownership and eligibility 
criterion since it ensures that there is domestic ownership and control 
of SBIR and STTR participants. However, SBA believed this criterion was 
too restrictive and failed to provide sufficient flexibility to small 
businesses when creating their ownership structure.
    As a result, SBA had proposed that an SBIR and STTR awardee must 
be: (1) More than 50% owned and controlled by U.S. citizens, permanent 
resident aliens, or domestic business concerns; or (2) majority-owned 
by multiple domestic VCOCs, hedge funds or private equity firms. As set 
forth above, SBA's then-current rule had already permitted majority 
ownership by more than just individuals; it also permitted majority 
ownership by one other business concern. The proposed rule opened the 
door to permit majority ownership by more than one business concern; in 
this case, it would have permitted majority ownership by more than one 
domestic business concern. (SBA also proposed eligibility requirements 
for those small businesses that are majority-owned by multiple VCOCs, 
hedge funds or private equity firms. That eligibility criterion is 
addressed in the next section).
    SBA had proposed a definition for the term ``domestic business 
concern'' to ensure that entities owning the SBIR or STTR awardee were 
domestic or U.S. based companies. SBA proposed that a domestic business 
concern is for profit, has a place of business located in the United 
States, and which operates primarily within the United States or which 
makes a significant contribution to the U.S. economy through payment of 
taxes or use of American products, materials or labor and be created or 
organized in the United States, or under the law of the United States 
or of any State. In the preamble to the proposed rule, SBA specifically 
stated that it considered whether to include a requirement that to be 
considered a domestic business concern, more than 50% of the business 
must either directly or indirectly be owned by U.S. citizens, permanent 
resident aliens, or domestic corporations, partnerships or limited 
liability companies (LLCs) and requested comments on this issue.
    The majority of comments received on this rule concerned the 
ownership and control requirements proposed and SBA's proposed 
definition of the term ``domestic business concern.'' SBA notes that 
some respondents agreed with the proposed eligibility criteria while 
others believed that the definition was too stringent and that SBA 
should broaden it. These respondents believed that having a United 
States base for the company and having the money spent here makes the 
company domestic. They believed that small businesses should see this 
as an opportunity to recruit more businesses and investments from 
abroad, as one respondent had already done. One respondent recommended 
SBA expand the ownership criteria to include ownership by H1 visa 
holders since many of them are technical people and not including them 
seems overly restrictive.
    Most of the comments SBA received, however, stated that majority 
ownership of an SBIR or STTR awardee by domestic business concerns, 
where there is no requirement that such business concern be majority-
owned by U.S. citizens, will allow foreign investors to own and control 
an SBIR awardee and participate in the program. These respondents 
thought the proposed rule created a loophole that would allow non-
domestic entities to create a domestic company in the United States by 
merely filing some papers and owning an SBIR or STTR awardee. These 
respondents expressed concern that this would cause U.S. taxpayer money 
to be spent overseas (despite the fact there is an SBIR and STTR 
requirement that the work performed on an SBIR/STTR project be 
performed in the United States).
    Other respondents expressed concern that the proposed rule would 
create a security risk and permit mission critical and sensitive 
technologies to be leaked overseas; although, at least one respondent 
noted that there are current restrictions by the Department of Defense 
and Federal Acquisition Regulations already in place to prevent this. 
Some respondents were concerned that the proposed rule could cause an 
increase in the number of SBIR and STTR solicitations being subject to 
International Traffic in Arms (ITAR) restrictions. Two respondents 
wanted SBA to limit foreign ownership to only 25% of an SBIR/STTR 
awardee; one respondent suggested that an SBIR/STTR awardee can be 
owned by U.S. companies, but the ownership must be 100%; and another 
suggested that the SBIR/STTR awardee must be 100% owned by U.S. 
citizens.
    Many of these respondents asked SBA to ensure that awardees remain 
domestically-owned in order to increase competitiveness in the United 
States. These respondents requested that SBA focus on the ownership of 
any entity that owns an SBIR or STTR awardee rather than where that 
entity incorporates or is located. These respondents believed that 
having a limitation on foreign ownership of any entity that owns an 
SBIR or STTR participant will prevent any potential loopholes. Other 
respondents recommended SBA retain its current rule; although some of 
these respondents seemed confused and believed that only U.S. citizens, 
and no business concerns, could currently own the SBIR or STTR awardee.
    In reviewing these comments and the concerns expressed by the 
respondents, SBA has issued a final rule that restricts foreign 
ownership in SBIR and STTR awardees and has therefore removed as 
unnecessary the definition of domestic business concern. Specifically, 
the final rule provides that an SBIR/STTR awardee must be a concern 
which is

[[Page 76217]]

more than 50% directly owned and controlled by one or more individuals 
who are citizens of the United States or permanent resident aliens in 
the United States, and/or other business concerns, each of which is 
more than 50% directly owned and controlled by individuals who are 
citizens of or permanent resident aliens in the United States. For 
example, a business that is 40% owned by U.S. citizens and 11% owned by 
a business concern that is in turn more than 50% owned and controlled 
by U.S. citizens, would be eligible for the SBIR or STTR program. SBA 
believes that this regulation addresses the concerns set forth in the 
comments that SBA should limit foreign ownership of an SBIR/STTR 
concern and ensure that the SBIR/STTR concern is owned and controlled 
by U.S. citizens.
    SBA also believes that this final rule is very similar to the 
former eligibility rule for the program, with only one modification. 
This final rule allows majority ownership by multiple small businesses 
while the former rule allowed majority ownership by one small business; 
further, both this final and the former rule require that these 
businesses be owned and controlled by U.S. citizens or permanent 
resident aliens.
    We also note that as in the proposed rule, SBA retained those 
provisions concerning ownership of an awardee by an Employee Stock 
Ownership Plan and eligibility of a joint venture. However, the content 
has been moved from Sec.  121.702(b) into the new section on SBIR 
ownership in Sec.  121.702(a) and STTR ownership in Sec.  121.702(b) 
and in Sec.  121.702(c)(6).

C. Section 121.702 -Ownership and Control by VCOCs, Hedge Funds or 
Private Equity Firms

    The SBIR/STTR Reauthorization Act specifically permits, in certain 
instances, awardees that are majority-owned by multiple VCOCs, hedge 
funds or private equity firms to participate in the SBIR program. 
Therefore, SBA had proposed amending its regulations to address this 
new statutory requirement.
    SBA received several comments stating that it should not permit 
business concerns that are majority-owned by multiple VCOCs, hedge 
funds or private equity firms to participate in the SBIR program. Other 
comments stated that the regulations failed to set forth the statutory 
limitations on such business concerns--that they receive only a certain 
percentage of the SBIR set-aside funds.
    As noted above, the recent statutory amendments to the SBIR program 
specifically permit companies that are majority-owned by multiple 
VCOCs, hedge funds or private equity firms to participate in the 
program. Therefore, SBA has issued final regulations permitting such 
businesses to participate in the SBIR program.
    In addition, we note that SBA's regulations do not address the 
limitations set forth in statute for participation of small businesses 
that are majority-owned by multiple VCOCs, hedge funds or private 
equity firms. Specifically, the statute states that the National 
Institutes of Health, Department of Energy, and the National Science 
Foundation may award not more than 25% of their SBIR funds to such 
small businesses. All other SBIR agencies may award not more than 15% 
of their SBIR funds to these small businesses. Those restrictions are 
set forth in the SBIR Policy Directive, which was published as final on 
August 6, 2012 at 77 FR 46806 (available at https://www.gpo.gov/fdsys/pkg/FR-2012-08-06/pdf/2012-18119.pdf). Because those provisions do not 
relate to the size or ownership of an SBIR/STTR awardee, they are not 
part of this regulation and only set forth in the policy directive.
    SBA also received several comments stating that businesses that are 
majority-owned by VCOCs, hedge funds or private equity firms should not 
participate in the STTR program. When drafting the regulations, SBA 
considered the fact that the statutory provisions relating to majority 
ownership by VCOCs, hedge funds or private equity firms specifically 
apply to the SBIR program. In addition, SBA considered the fact that 
Sec.  5104 of the SBIR/STTR Reauthorization Act permits a small 
business concern that received a Phase I award under the SBIR or STTR 
program to receive a Phase II award in either the SBIR or STTR program. 
Therefore, an SBIR Phase I awardee may be able to receive an STTR Phase 
II award. Therefore, SBA believed that the eligibility rules of both 
programs should be the same and consistent. As a result, SBA's proposed 
amendments relating to concerns that are majority-owned by multiple 
VCOCs, hedge funds or private equity firms applied to both the SBIR and 
STTR programs.
    Several respondents argued that concerns that are majority-owned by 
multiple VCOCs, hedge funds or private equity firms should not be able 
to participate in the STTR program because it was not so intended by 
Congress. One respondent believed that money in the STTR program is 
already going to universities and this proposal would dilute the 
program more for small businesses. SBA has reviewed this issue and has 
decided that such businesses may not participate in the STTR program. 
SBA has revised the rule accordingly and has set forth two separate 
eligibility criteria--one for the SBIR program (Sec.  121.702(a)) and 
one for the STTR program (Sec.  121.702(b)).
    SBA also received several comments stating that the rule needs to 
ensure that the VCOC, hedge funds and private equity firms that own an 
SBIR awardee are more than 50% owned by U.S. citizens and/or not 
controlled by foreign investors. Many respondents suggested that the 
VCOC, hedge fund and private equity firm disclose their foreign 
ownership. SBA has reviewed these comments and has retained the 
requirement in the rule that the VCOC, hedge fund or private equity 
firm must have a place of business located in the United States and be 
created or organized in the United States, or under the laws of the 
United States or of any State in order to ensure that it is 
domestically-owned and not foreign-controlled. SBA believes that it 
would be difficult for small businesses to certify as to the ownership 
of a VCOC, hedge fund or private equity firm without undue burden.
    In addition, a few respondents believed that there were some 
potential loopholes with the ownership by VCOCs, hedge funds or private 
equity firms. Specifically, one respondent stated that the same 
investors could own several VCOCs, which in turn own the SBIR awardee. 
Although on paper the SBIR awardee would be majority-owned by several 
VCOCs, in reality it would be owned and controlled by the same group of 
investors. Another respondent stated that a domestic company could own 
more than 50% of an SBIR awardee and in turn, that domestic company is 
owned by a VCOC. In essence, one VCOC could own more than 50% of an 
SBIR awardee.
    SBA does not believe the final rule creates these loopholes. First, 
any awardee that is majority-owned by VCOCs, hedge funds or private 
equity firms will be subject to the limitation on awards to such 
business. We do not believe that investors will set up several VCOCs 
and have those VCOCs invest in an SBIR awardee simply to skirt the 
limitations on the awards to small businesses that are majority-owned 
by VCOCs. Second, under the rules a small business that owns more than 
50% of an SBIR awardee could not, in turn, be majority-owned by a VCOC 
since the rule requires that such business concerns be more than 50% 
owned by U.S. citizens or permanent resident aliens.
    Finally, two respondents believed that one VCOC should be permitted 
to own

[[Page 76218]]

more than 50% of an SBIR awardee. One respondent stated that it is 
easier to work with one investor than with multiple investors. In 
response to these comments, we note that the SBIR/STTR Reauthorization 
Act specifically permits participation in the SBIR program by 
businesses that are majority-owned by multiple VCOCs, hedge funds or 
private equity firms. As a result, SBA is implementing those provisions 
and is not permitting majority ownership by a single VCOC, hedge fund 
or private equity firm.

D. Section 121.702--Ownership and Control--Fully Diluted Basis

    SBA received one comment stating that it should evaluate ownership 
and control of a company using fully diluted shares on a converted 
basis. This respondent stated that this is the financial figure 
companies commonly provide to investors to assess their financial 
situation. Therefore, it is easy for a company to provide this 
information. Determining ownership and control on a fully diluted basis 
means that all of the following would be considered: Outstanding common 
stock, all outstanding preferred stock (on a converted to common 
basis), all outstanding warrants (on an as exercised and converted to 
common basis), all outstanding options and options reserved for future 
grants, and any other convertible securities on an as converted to 
common basis. This respondent believes it would accurately reflect 
ownership and ensure that companies are consistently providing the most 
transparent information regarding ownership. In addition, the 
respondent believed that this type of evaluation should also be used to 
determine affiliation.
    SBA agrees with this comment and has added this to the final rule 
at Sec.  121.702(d). SBA believes that this provision clarifies this 
issue and utilizes a definition that is most commonly used in the 
market and is therefore consistent with generally accepted market 
practice. In addition, SBA's regulations have always given present 
effect to stock options when calculating an individual's or entity's 
ownership and control and it is thus logical and consistent to have 
that be the case when calculating total ownership and control of the 
business. This will clarify how SBA determines affiliation, ownership 
and control for the program.

E. Section 121.702--Size and Affiliation

1. Size--500 Employee Size Standard
    Section 5107(c)(3)(B) of SBIR/STTR Reauthorization Act requires 
that under the already existing authority for SBA to establish size 
standards, 15 U.S.C. 632(a), SBA shall establish size standards for 
awardees that are majority-owned by multiple VCOCs, hedge funds or 
private equity firms. The current size standard for SBIR and STTR 
awardees is 500 employees. This means that an awardee, including its 
affiliates, cannot have more than 500 individual employees on a full-
time, part-time or other basis, and includes employees obtained from a 
temporary employee agency, professional employer organization, or 
leasing concern. SBA uses the average number of the business concern's 
employees based upon the number of employees for each of the pay 
periods for the preceding completed 12 calendar months (see 13 CFR 
121.106(b)(1)) to determine the size of the business.
    SBA had reviewed the 500-employee size standard and did not propose 
any changes. The 500 employee size standard is the current size 
standard for all research and development (R&D) North American Industry 
Classification System (NAICS) codes, including SBIR and STTR. For 
example, both NAICS 541711, Research and Development in Biotechnology, 
and NAICS 541712, Research and Development in the Physical, Engineering 
and Life Sciences (except Biotechnology) have 500 employee size 
standards.
    Some respondents recommended that SBA retain the current size 
standard. Other respondents stated that the size standard should be 
lowered and believed that the size standard should be anywhere from 20 
to 300 employees. Most of these respondents believed that any company 
with more than 100 employees has sufficient capital for their business 
and does not need to participate in a small business set-aside program. 
Some respondents thought there should be a dual size standard--a 
receipts-based and employee-based size standard for SBIR and STTR 
awards. Two respondents recommended a gross revenue or asset limitation 
in addition to the employee size standard. Two other respondents 
recommended SBA define size in categories (very small/small or 
discovery, early stage, small business growth). Three respondents 
believed SBA should only count full-time or full-time equivalents as 
employees and not count individuals working part-time as employees.
    SBA notes that in 2007, it began a comprehensive review of its size 
standards to determine whether existing size standards have supportable 
bases relative to the current data, and to revise them, where 
necessary. In addition, on September 27, 2010, the President of the 
United States signed the Small Business Jobs Act of 2010 (Jobs Act), 
Pub L. 111-240, which directs SBA to conduct a detailed review of all 
size standards and to make appropriate adjustments to reflect market 
conditions. Specifically, the Jobs Act requires SBA to conduct a 
detailed review of at least one-third of all size standards during 
every 18-month period from the date of its enactment and review of all 
size standards not less frequently than once every 5 years thereafter. 
SBA has chosen not to review all size standards at one time. Rather, it 
is reviewing groups of related industries on a Sector by Sector basis. 
When SBA reviews those size standards relating to R&D, it will also 
review the SBIR and STTR size standards. Therefore, SBA is retaining 
the current 500 employee size standard.
2. Affiliation--General (Sec.  121.702(c)(1))
    SBA had proposed to amend its regulations relating to affiliation, 
solely for purposes of the SBIR and STTR programs. SBA's regulations, 
at Sec.  121.103, address the principles of affiliation. Generally, 
affiliation exists when one business controls or has the power to 
control another or when a third party (or parties) controls or has the 
power to control both businesses. Control may arise through ownership, 
management, or other relationships or interactions between the parties. 
Affiliation is an important issue when determining size because SBA 
counts the receipts, employees, or other measure of the business, and 
includes those of all its domestic and foreign affiliates, regardless 
of whether the affiliates are organized for profit (13 CFR 
121.103(a)(6)).
    Specifically, section 5107(c)(3)(D) of the SBIR/STTR 
Reauthorization Act set forth an outline for affiliation with respect 
to those concerns that are majority-owned by VCOCs, hedge funds, or 
private equity firms, as well as any other business that the VCOC, 
hedge fund, or private equity firm has financed. In reviewing these 
statutory provisions, the purpose of the amendments to the SBIR and 
STTR programs, the purpose of the SBIR and STTR programs, and the 
overall goal of simplification and maximization of benefits for small 
businesses, SBA proposed amendments to the current affiliation rules, 
solely with respect to these programs. As a result, SBA proposed to 
address size and affiliation for the SBIR and STTR programs in Sec.  
121.702, and not in Sec.  121.103, to avoid any confusion. In the 
proposed rule, SBA sought comments on its proposal to create bright-
line tests for SBIR and STTR participants to apply when

[[Page 76219]]

determining eligibility with respect to size and affiliation. In 
addition, SBA sought specific comments on various sections of the 
proposed rule relating to affiliation.
    SBA received numerous comments on its proposed affiliation 
regulations. Some respondents thought that SBA should retain its 
current affiliation rules while others thought that the proposed rules 
are understandable, prevent undue control and meet legislative intent.
    SBA also received several comments on the specific affiliation 
rules it proposed. As a result of the comments received, SBA believes 
that some changes to the current and proposed affiliation rules are 
needed and has addressed each below.
3. Affiliation--Minority Ownership Rule (Sec.  121.702(c)(2))
    SBA sought comments on what has come to be known as the ``minority 
ownership rule.'' Specifically, in the proposed rule SBA explained that 
where an SBIR or STTR awardee's voting stock is widely held or two or 
more persons hold large blocks of voting stock but no one person owns 
more than 50% of the stock, then it would deem the board of directors 
to control the awardee. SBA sought comments on that proposal as well as 
comments on whether it should: (1) Retain the current affiliation rule 
with respect to minority stock holdings and if so, whether it should 
set forth a specific threshold by which it will find control and 
therefore affiliation (e.g., if a person owns 33% or more of the 
company) in order to create a bright-line test for awardees; (2) find 
affiliation if two or three persons or businesses collectively own more 
than 50% of the awardee, and the same two or three persons or 
businesses collectively own more than 50% of any other company or 
entity; or (3) implement a rule setting forth both options (1) and (2) 
above.
    SBA received numerous comments stating that SBA should retain the 
current version of the minority ownership rule. Most of these 
respondents were concerned that by removing the minority ownership 
rule, it would allow a large business to own 49% of an SBIR/STTR 
awardee, or even two large businesses to own most of the company and 
still be eligible. These respondents thought that eliminating the rule 
would create a loophole. Other respondents believed that SBA should not 
focus on the board of directors controlling the company, but should 
focus on stock or equity ownership in the company. A few respondents 
stated that venture capital shareholders that own a minority of the 
company still control the company by other means, such as control of 
the board, unilateral right to force a sale, budgets, officers, 
acquisitions, etc. Two respondents appear to argue that SBA should have 
separate affiliation rules for venture-backed companies that have been 
through complex legal negotiations, and other companies.
    SBA also received comments supporting SBA's creation of a bright 
line test for determining affiliation. One respondent stated that the 
proposed rule reflected congressional intent and created clear and 
precise benchmarks. Another respondent stated that SBA should retain 
the proposed rule finding affiliation only if the entity owns 50% or 
more of the awardee as long as SBA retains the other affiliation rules 
to ensure that the minority shareholder is not really controlling the 
company.
    SBA also received one comment on the alternatives proposed 
concerning the minority shareholder rule. This respondent thought that 
the alternatives were overly burdensome and may cause affiliation with 
companies with different goals and risk but merely with shared 
investors. The respondent believed that SBA should not affiliate 
companies if two or three persons own more than 50% of an SBIR/STTR 
awardee and more than 50% of another business since it is normal for 
investors to invest in similar companies but have these investments 
considered individual investments.
    SBA understands the concerns expressed by the respondents that do 
not want SBA to change its regulation on the minority shareholder rule. 
Under that regulation, if a business concern's stock is widely held and 
no single block of stock is large as compared to others, then SBA deems 
the board of directors and President or Chief Executive Officer to 
control the business concern, unless they can present evidence showing 
otherwise. In addition, if two or more persons own, control or have the 
power to control less than 50% of the concern's voting stock, but the 
blocks of stock are equal or approximately equal in size and the 
aggregate of the holdings is large as compared with other stock 
holdings, then SBA presumes each person to control the business 
concern.
    SBA believes that retaining the current minority shareholder rule 
would be contrary to the broader mandate of simplifying and clarifying 
government regulations. In fact, SBA's Office of Hearings and Appeals 
(OHA) has stated that there is nothing that defines these requirements 
in the minority shareholder rule. For example, OHA has stated that 
there is nothing that ``defines exactly how much larger the single-
largest minority interest must be `compared to other outstanding blocks 
of voting stock' in order to cause affiliation under 13 CFR 
121.103(c)(1).'' Size Appeal of SIGA Technologies, Inc., SBA No. SIZ-
5201 (2011) (available at https://www.sba.gov/oha/3393). As a result, 
SBA has issued a final rule that takes both views into consideration 
and slightly amends the current minority shareholder rule to create a 
test for a small business to use when determining its size.
    The final rule states that for determining affiliation based on 
stock ownership, SBA will find a concern is an affiliate of a person 
that owns, or has the power to control, more than 50 percent of the 
company's voting stock; however, SBA may also find a concern an 
affiliate of a person that owns, or has the power to control, 40% or 
more of the voting stock based upon the totality of circumstances. SBA 
reviewed OHA decisions to determine that there may be affiliation with 
a minority shareholder holding more than 40% of the equity in a 
business, but there is less of a likelihood of finding affiliation with 
a minority shareholder holding less than 40% of the equity. See Size 
Appeal of Cytel Software, Inc., SBA No. SIZ-4822 (2006) (available at 
https://www.sba.gov/oha/3393) (44.07% of voting stock is large compared 
to the next block of 24.75%); Size Appeal of Procedyne Corp., SBA No. 
SIZ-4354 (1999) (available at https://www.sba.gov/oha/3393) (42.1% is 
large compared to the next block of 18.9%); Size Appeal of Asphalt 
Products Corp., SBA No. SIZ-2589 (1987) (available at https://www.sba.gov/oha/3393) (45% is large compared to the next block of 30%); 
Size Appeal of Lebanon Foundry & Machine Company, SBA No. SIZ-2433 
(1986) (available at https://www.sba.gov/oha/3393) (45% is large 
compared to the next block of 30%); and Size Appeal of U.S. Grounds 
Maintenance, Inc., SBA No. SIZ-4601 (2003) (available at https://www.sba.gov/oha/3393) (46.67% is large compared to the next block of 
33.33%).
    In addition, SBA has also included a separate paragraph in the rule 
stating that it will find affiliation under the totality of 
circumstances even if no one single factor for finding affiliation 
exist at Sec.  121.702(c)(10). That means that SBA could find 
affiliation with a minority shareholder (including one that owns less 
than 40% equity in the SBIR/STTR awardee) if the totality of the 
circumstances so warrant such a finding. Consequently, we believe that 
the combination of all of these provisions in the final rule 
simultaneously helps give clearer guidance to small businesses while

[[Page 76220]]

providing SBA with the flexibility it needs to find affiliation in 
those cases where businesses may be trying to game the system, which 
was one of the primary comments received on the rule.
4. Affiliation--Common Management (Sec.  121.702(c)(3))
    SBA received one comment stating that it needs a more explicit test 
for finding control based upon common management. Specifically, this 
respondent believes that the officer, managing member, etc. should also 
be required to own more than 50% of the board seats of another business 
or own more than 50% of the business.
    SBA does not agree with this comment. There are separate tests for 
affiliation--one finding affiliation based on ownership of equity in 
the company and one finding affiliation based on management. The two 
are sometimes intermixed, but it would not be necessary for a finding 
of affiliation. If a person is the President of one company and also 
the President of another company, SBA will continue to find that the 
two companies are affiliated.
5. Affiliation--Identity of Interest (Sec.  121.702(c)(4))
    According to the proposed rule, SBA may find affiliation if two or 
more persons have an identity of interest, which includes family 
members with identical or substantially identical business or economic 
interests or firms that are economically dependent through contractual 
or other relationships. An individual or firm may rebut a determination 
of identity of interest with evidence showing that the interests deemed 
to be one are in fact separate.
    One respondent urged SBA to loosen the ``economic dependence'' 
element of the identity of interest affiliation rule based on the 
unique circumstances of research firms. SBA agrees with the comment 
that in certain situations, such relationships may not constitute 
affiliation. That is why the rule specifically allows a small business 
to rebut any presumption of affiliation based upon an identity of 
interest. SBA did not include the specific reference to research 
collaborations in the final rule because each situation is different 
and SBA may still find affiliation to exist based on research 
collaborations in combination with other factors.
    However, based on this comment, SBA did believe it was important to 
establish a specific standard by which it may find economic dependence 
under the identity of interest rule. According to SBA's OHA, it ``has 
found identity of interest based on economic dependence when one firm 
relies upon another for 70% or more of its receipts.'' Size Appeal of 
Faison Office Prods., LLC, SBA No. SIZ-4834, at 10 (2007) (available at 
https://www.sba.gov/oha/3393). Therefore, in the final rule SBA has 
stated that it may find affiliation based upon economic dependence if 
the SBIR/STTR awardee relies upon another entity for 70% or more of its 
receipts.
6. Affiliation--Newly Organized Concern Rule(Sec.  121.702(c)(5))
    In the proposed rule, SBA sought input on whether the newly 
organized concern rule applied to the SBIR/STTR programs, which are 
research and innovation programs. SBA received a few comments stating 
that such a rule does not apply to these programs and prevents the 
creation of spin-off firms. One respondent suggested that SBA should 
specify a number of years after which a firm would no longer be 
considered ``new'' under the rule.
    Upon further review, SBA believes that the newly organized concern 
rule is an important affiliation rule since it is used to prevent a new 
company from forming and subcontracting all of its work to another 
company that is other than small or otherwise does not meet the 
eligibility requirements of the program. As a result, SBA is retaining 
the rule. However, SBA agrees that the rule could be further defined 
for the SBIR/STTR programs and therefore SBA has issued a final rule 
stating that a firm that has been actively operating continuously for 
more than one year will no longer be considered ``new'' for purposes of 
this affiliation rule.
7. Affiliation--Ostensible Subcontractor (Sec.  121.702(c)(7))
    SBA also proposed to find affiliation based upon the ostensible 
subcontractor rule. Two respondents asked SBA to amend the ostensible 
subcontracting rule so it would not cause affiliation between SBIR/STTR 
awardees and a subcontractor performing testing or trials of drugs or 
other products. These respondents explained that it is too costly for 
small businesses to perform such tests, especially on humans, and that 
most companies use Clinical Research Organizations to perform such 
tests. These respondents did not believe they should be found 
affiliated with such organizations.
    SBA agrees with the comments. Although SBA does not believe it 
would find an SBIR/STTR awardee affiliated with a company performing 
product testing under the ostensible subcontracting rule (unless of 
course testing is the sole purpose of the funding agreement), we do not 
believe it is necessary to specifically state so in a rule. There are 
many other instances where SBA would not find affiliation under the 
ostensible subcontractor rule and as a result, we cannot enumerate each 
and every one of them in the final rule.
8. Affiliation--License Agreements (Sec.  121.702(c)(8))
    In the proposed rule, SBA stated that it will consider whether 
there is a license agreement concerning a product or trademark which is 
critical to operation of the licensee when determining affiliation. 
However, the rule explained that a license agreement will not cause the 
licensor to be affiliated with the licensee if the licensee has the 
right to profit from its efforts and bears the risk of loss. SBA 
explained that it may find affiliation through other means, such as 
common ownership or common management.
    Two respondents suggested a provision that would find affiliation 
where a large company has exclusive rights to the intellectual property 
that would be developed by the SBIR/STTR awardee. SBA believes its 
regulation addresses this scenario by allowing SBA to find affiliation 
where the licensee does not have the right to profit from its efforts. 
Therefore, SBA does not believe any changes are necessary.
    One respondent further sought a definition of ``critical to 
operation'' with respect to affiliation based on license agreement. SBA 
clarifies here that the use of the phrase ``critical to operation'' was 
intended to exclude any non-critical licenses from affiliation 
analysis. The affiliation rule here is an adapted version of the 
franchise rule that SBA uses in its government contracting and 
financial assistance programs. SBA does not believe any amendment to 
the proposed rule is required and would use a common sense approach and 
consider a license agreement to be critical to operation when it as 
integral to a participant's business as a franchise is to a franchisee.

F. Section 121.704--When SBA Determines Size and Eligibility

    SBA's proposed regulations for the SBIR and STTR programs stated 
that size and eligibility would be determined at the time of submission 
of the funding agreement offer and at the time of award for both Phase 
I and Phase II awards. SBA had requested comments on this proposal and 
comments on whether it should retain the current requirement that the 
small business certify its size and eligibility at the time of award 
only.

[[Page 76221]]

    Several respondents agreed with the proposed rule and stated that 
it was appropriate to require certification at time of offer and award. 
At least one respondent stated that the company should be an 
established business at the time it submits its proposal. Two 
respondents agreed that certifying at time of offer is more 
straightforward because it provides a date certain. Three respondents 
believed that SBA should require a certification at time of offer and 
perhaps at time of award, but not during the lifecycle of the program.
    Other respondents argued that SBA should only require a small 
business to certify at the time of award and not require the business 
to certify at the time of offer. These respondents believe that there 
should only be certification at the time of award because: Screening 
small businesses at time of offer is too restrictive and will decrease 
the number of applicants; there is too much of a lag time between the 
offer and award and it would maximize the program to require 
certification at the time of award only; establishing a business is 
expensive and this should only be required if the company will receive 
an award; and having certification at the time of offer would allow 
non-eligible businesses to write a proposal and establish a front 
company to submit the proposal and acquire the awardee while they wait 
for the award. One respondent thought we should require certification 
30 days prior to award.
    In addition, several respondents argued that they would be unable 
to meet the principal investigator requirement at the time they submit 
an offer and, therefore, they should only certify at the time of award. 
One respondent stated that a person should not have to waste resources 
trying to comply with the requirements at the time of offer, when they 
are unsure they will even get an award.
    We note that several of these respondents misunderstood the 
proposal. For example, SBA proposed a certification as to size and 
eligibility (ownership and control requirements) in the rule. Any 
certification that the principal investigator will spend a certain 
percentage of his/her time working for the small business has nothing 
to do with size and eligibility (ownership and control). Therefore, 
certifications for size and eligibility at the time of submission of a 
proposal would not have required anything concerning the principal 
investigator. In other words, the principal investigator could remain 
at their other job until award, and then go to work for the small 
business.
    In addition, many respondents believe they do not have to be an 
established business entity at the time they submit the offer. These 
businesses should consider the fact that the U.S. Government 
Accountability Office (GAO) has stated the following: ``It is true that 
a contract cannot be awarded to any entity other than the one which 
submitted the proposal.'' Command Management Services, Inc., B-310261, 
B-310261.2, Dec. 14, 2007, 2008 CPD ] 29 (available at https://www.gao.gov/legal/). GAO believed that having a different 
offeror and awardee may not bind any legal entity to the contract 
obligations or may evidence an unacceptable transfer or assignment of 
proposals. Trandes Corporation, B-271662, Aug. 2, 1996, 96-2 CPD ] 57 
(available at https://www.gao.gov/legal/).
    Nonetheless, SBA has decided to retain its current rule and require 
certification as to size and eligibility (ownership and control) at the 
time of award only. However, we note that the SBIR and STTR Policy 
Directives will also require the small business to certify it meets the 
other program criteria (e.g. performing the required percentage of 
work, employing the principal investigator) at the time of award and 
during the lifecycle of the award. Further, there may be other 
certifications required by the System for Award Management (SAM), the 
new online system that consolidates the capabilities that used to be 
found in the Central Contractor Registration and Online Representations 
and Certifications Application.
    SBA also requested comments on how to treat an SBIR/STTR business 
that becomes other than small or is acquired by or otherwise merged 
with another entity during an SBIR/STTR award. For example, with 
respect to small business status for government contracting, the small 
business is permitted to grow to be other than small during the life of 
the contract and there is no need for it to re-represent its status on 
a particular contract or for the government to terminate the contract. 
There are two exceptions to this general rule: (1) A small business 
must recertify its status if it has been acquired by or merged with 
another business concern; or (2) the contract is greater than five 
years. At those times, the small business must recertify its status and 
if it is no longer small, the contracting officer cannot count any 
options exercised or orders issued against the contract as an award to 
a small business. SBA had requested comments on whether this policy and 
the procedures should be extended to the SBIR program.
    SBA received one comment supporting this proposal. The respondent 
agreed with recertification if there has been a merger or acquisition 
or the contract or grant exceeds five years (which is rare for a Phase 
I or Phase II award). As a result, SBA has decided to adopt this 
proposal in the final rule. Therefore, if an SBIR or STTR awardee is 
acquired during performance of an SBIR or STTR funding agreement, it is 
permitted to continue working on the funding agreement. However, it 
would be required to recertify its size and ownership and control 
status and if it is no longer small (no longer meets the size/
ownership/control requirements of the program), the agency cannot use 
SBIR funds for the next option on a funding agreement that is a 
contract or grant or for continuation of a grant. This would mean the 
agency could fund the award, but not using SBIR/STTR money. SBA has 
added this requirement to the final rule at Sec.  121.704(b). This is 
modeled after the recertification provision in SBA's size standard 
rules. 13 CFR 121.404(g).
    SBA has added this requirement to the final rule at Sec.  121.704.

G. Section 121.705--Certification of Size and Eligibility

    Section 5107 of the SBIR/STTR Reauthorization Act requires that all 
small business concerns that are majority-owned by multiple VCOCs, 
hedge funds, or private equity firms and qualified for participation 
must register with SBA prior to or on the date that it submits an 
application in response to an SBIR solicitation or announcement. In 
addition, the new statutory provisions require that such small 
businesses indicate in any SBIR proposal that they have completed this 
registration. SBA had proposed to amend this section of the regulations 
to address these new requirements. SBA requested comments on whether it 
should maintain a separate registration for purposes of the SBIR and 
STTR programs only, or should amend its current Dynamic Small Business 
Search (DSBS) system to use as its registry.
    SBA received one comment stating that those small businesses that 
are majority-owned by VCOCs, hedge funds or private equity firms should 
register, but the registration should be a self-certification. SBA 
received another comment stating that SBA should create a new registry 
because we would be collecting more and different information than 
collected for DSBS.
    SBA agrees with these comments. At this time, SBA is working on 
creating a database, which would be part of the SBIR/STTR system known 
as Tech-Net.

[[Page 76222]]

This database will serve as a registration portal for SBIR and STTR 
small businesses. This final rule states that such businesses must 
self-certify their status. SBA has addressed more specifics about the 
registry and the registration requirements in its policy directives, 
which can be found at 77 FR 46806 (SBIR Policy Directive, available at 
https://www.gpo.gov/fdsys/pkg/FR-2012-08-06/pdf/2012-18119.pdf) and 77 
FR 46855 (STTR Policy Directive, available at https://www.gpo.gov/fdsys/pkg/FR-2012-08-06/pdf/2012-18119.pdf).
    In addition, section 5107(a) of the SBIR/STTR Reauthorization Act 
states that certain ``covered small business concerns'' are eligible to 
receive SBIR awards, without regard to whether the covered small 
business concern meets the requirements for receiving an award under 
the SBIR program at the time of award, if an agency took longer than 
nine months from the date applications were due to issue an award. A 
covered small business concern is one that was not majority-owned by 
multiple VCOCs, hedge funds, or private equity firms at the time of 
submission of a Phase I or Phase II application (and therefore did not 
register), but that was majority-owned on the date of award.
    The proposed regulations addressed this statutory provision 
concerning covered small business concerns and stated that if a small 
business concern did not register as majority-owned by multiple VCOCs, 
hedge funds or private equity firms at the time it submitted its 
application, it must notify the funding agreement officer if, on the 
date of award, the concern is more than 50% owned by multiple VCOCs, 
hedge funds, or private equity firms.
    SBA received one comment that supports the rule. SBA also received 
one comment stating that such covered small businesses should not be 
allowed to participate in the program since at least one SBIR agency 
often exceeds the 9 month timeframe for making an award. SBA notes that 
such business concerns are permitted to participate by statute, and 
therefore this eligibility requirement is set forth in the final rule. 
As a result, SBA has adopted its proposed rule on this as final.

H. Section 121.1001(a)(4)--Initiating a Protest or Request for Formal 
Size Determination

    In Sec.  121.1001(a)(4) of the proposed rule, SBA set forth who may 
initiate a size protest or request a formal size determination. SBA had 
proposed amending this section to state that a current offeror and the 
Associate Administrator, Investment Division may file a protest. Some 
of these proposed changes corresponded to the move of SBA's Office of 
Innovation to its Investment Division.
    SBA received one comment noting that there is a redundancy and 
possible error in the proposed rule, since it states twice that an 
offeror can file a size protest. SBA has amended and deleted the 
redundancy and the final rule now permits any offeror or applicant, the 
funding agreement officer, or personnel from SBA to file a protest.

I. Section 121.1004--Time Limits that Apply to Size Protests

    In this section, SBA proposed to address when a protest may be 
filed by an offeror/applicant, the contracting officer/funding 
agreement officer, or SBA with respect to an SBIR or STTR award. The 
current regulations state that the contracting officer or SBA may file 
a protest in anticipation of an award. SBA proposed to amend this 
regulation to state that SBA or the contracting officer/funding 
agreement officer may file a protest at any time, as long as it is not 
premature. This means that SBA would not accept a size protest until 
the awardee has been selected and notified of the award, which is 
consistent with current practice for its contracting programs.
    SBA received one comment stating that neither SBA nor the funding 
agreement officer should be allowed to file a protest after award. 
Another respondent stated that SBA should request payroll records to 
determine size and should audit the business when it is at 50% of its 
employment size limit.
    SBA disagrees with the comment that a protest should not be filed 
after award by the SBA or the funding agreement officer. SBA may not 
find out about an award and the funding agreement officer may not 
receive credible information about the business until after the award 
is issued. Therefore, SBA and the funding agreement officer should be 
permitted to still file a size or eligibility protest if there is 
credible information that the awardee does not meet the program's 
requirement. If SBA or the funding agreement officer did not file such 
a protest, then the same awardee could continue to receive awards for 
which they might not be eligible. Therefore, SBA has adopted the 
proposed rule as final.
    Further, SBA does not per se audit the SBIR and STTR awardees. 
Instead, SBA will collect payroll and other information during the 
course of a size protest.

J. Other

    SBA received several comments that are outside the general scope of 
this rulemaking. For example, we received comments that SBA should: 
allow the principal investigator to spend less than 50% of his/her time 
working for the small business; level the playing field between states 
with a smaller number of SBIR awardees and those with a higher number 
of SBIR awardees; amend the award threshold; ban lobbying for SBIR 
companies; limit the number of Phase I awards and the total lifetime 
accumulated SBIR funds that can be awarded to a small business; require 
reviewers to review recent patent filings to determine the List of 
Topics for a solicitation; use SBIR money to only fund risky 
innovations; help inexperienced bidders; give priority in awards to 
innovate start-ups; lower the percentage of work a small business is 
required to perform for a Phase I award; and address disputes involving 
Phase III awards. SBA has addressed many of these issues in the SBIR 
and STTR Policy Directives, which are available at 77 FR 46806 (SBIR 
Policy Directive) and 77 FR 46855 (STTR Policy Directive).

Compliance With Executive Orders 12866, 12988, 13132, 13563, the 
Paperwork Reduction Act (44 U.S.C., Chapter 35) and the Regulatory 
Flexibility Act (5 U.S.C. 601-612)

Executive Order 12866

    OMB has determined that this rule is a significant regulatory 
action under Executive Order 12866; however this is not a major rule 
under the Congressional Review Act (CRA). SBA set forth its Regulatory 
Impact Analysis in the proposed rule and received five comments on it. 
We have updated the analysis and addressed the comments below.

Regulatory Impact Analysis

1. Necessity of Regulation
    This regulatory action implements the SBIR/STTR Reauthorization 
Act. Specifically, it implements section 5107 of the SBIR/STTR 
Reauthorization Act of 2011, which requires SBA to issue final 
regulations amending 13 CFR 121.103 (relating to determinations of 
affiliation applicable to the SBIR program) and 13 CFR 121.702 
(relating to ownership and control and size for the SBIR program) 
within one year of passage of the Reauthorization Act.
    SBA has amended its regulation to address affiliation, ownership 
and control for participants in the SBIR and STTR programs. In 
addition, the agency amended its regulations to address the

[[Page 76223]]

new statutory provisions relating to majority ownership of SBIR 
awardees by VCOCs, hedge funds or private equity firms.
2. Alternative Approaches to Rule
    SBA considered numerous alternatives when drafting this regulation, 
which were set forth in the preamble to the proposed rule. SBA received 
and considered over 250 comments on the proposed rule. Many of the 
comments set forth alternatives to SBA's proposed rule, which are 
discussed in the proposed rule preamble. SBA has adopted some of the 
recommendations set forth in the comments.
3. The Potential Benefits and Costs of This Regulatory Action.
    In the proposed rule, SBA stated that one potential benefit of the 
rule is to increase participation in the SBIR and STTR program by 
providing more businesses access to these programs. SBA stated that the 
increase in competition would ultimately increase the quality of 
proposals and spur innovation.
    SBA received four comments on this analysis. Three respondents 
argued that there is no need to increase competition in the SBIR and 
STTR programs or that increased competition will result in better 
proposals. These respondents believe that the programs are already 
competitive; there is simply not enough money to fund all of the 
proposals.
    Competition is one of the central principles of contracting. It is 
generally believed that when an agency receives multiple offers, there 
is an increased likelihood the government can acquire higher quality 
goods and services at lower prices than it would acquire if it awarded 
contracts without competition or with less competition. However, we 
understand the concern that these small businesses have expressed 
concerning the impact this regulation may have on the programs and the 
potential increase in the number of applications submitted in response 
to an SBIR or STTR solicitation. We note that agencies are required to 
report certain information to SBA, so that SBA can monitor the number 
of applications submitted and the number of awards issued under the 
program. This information is available at www.sbir.gov. SBA will 
continue to review this information and monitor any impact on the 
program.
    SBA also received a comment stating that we should take into 
account the impact of job losses in the U.S. and the increase in jobs 
overseas as a result of this rule. SBA does not believe this rule will 
increase job losses in the U.S. or result in an increase in jobs 
overseas and the respondent provided no data or evidence to support the 
contention.
    In the proposed rule, SBA stated that there are a few anticipated 
costs. The statute requires SBA to maintain a registry of businesses 
that are majority-owned by multiple VCOCs, hedge funds or private 
equity firms. SBA will maintain a separate system for its registry and 
this will result in a cost to SBA. Further, as a result of the 
anticipated increase in proposals for the SBIR/STTR program, we 
continue to believe the agencies will have a need for additional staff. 
In addition, we continue to anticipate there may be an increase in size 
protests, which will increase SBA's size specialists' current workload.
    SBA received one comment on the potential costs. This respondent 
believes that there will be additional recordkeeping costs and this 
will reduce funds spent on developing the technology. This respondent 
recommended that SBA increase only the recordkeeping costs for 
businesses that are majority-owned by multiple VCOCs, hedge funds or 
private equity firms. SBA agrees that there are new statutory reporting 
requirements that may increase costs to SBIR and STTR awardees, 
although SBA intends to try to defray costs by creating a system that 
does not require a small business to input the same data more than 
once. SBA addressed these costs in the Paperwork Reduction Act (PRA) 
information collection it submitted with the SBIR and STTR Policy 
Directives.

Executive Order 13563

    The SBIR/STTR Reauthorization Act of 2011 imposes a specific 
statutory deadline by which SBA must issue a proposed and a final 
regulation. Specifically, SBA was required to issue a proposed rule by 
April 29, 2012. Given the time needed to comply with various 
administrative rulemaking requirements, it was not practicable for SBA 
to hold public forums prior to issuing a proposed rule, as the 
executive order recommends, and still be able to meet the April 29th 
statutory deadline. However, SBA held public forums (e.g., town hall 
meetings, webinars) once it issued the proposed rule to afford the 
public an opportunity to participate in the rulemaking process as 
envisioned by this executive order. SBA had also provided for a 60-day 
comment period and requested comments on not just the entire rule, but 
specific parts of the rule where SBA considered several alternatives or 
options for implementation. SBA received over 250 comments on the rule.

Executive Order 12988

    This action meets applicable standards set forth in Sections 3(a) 
and 3(b)(2) of Executive Order 12988, Civil Justice Reform, to minimize 
litigation, eliminates ambiguity, and reduce burden. The action does 
not have retroactive or preemptive effect.

Executive Order 13132

    For the purposes of Executive Order 13132, SBA has determined that 
this final rule will not have substantial direct effects on the States, 
on the relationship between the national government and the States, or 
on the distribution of power and responsibilities among the various 
levels of government. Therefore, SBA has determined that this final 
rule has no federalism implications warranting preparation of a federal 
assessment.

Paperwork Reduction Act, 44 U.S.C., Ch. 35

    For purposes of the Paperwork Reduction Act, 44 U.S.C. Chapter 35, 
SBA has determined that this final rule will impose new reporting or 
recordkeeping requirements. For example, business concerns that are 
majority-owned by multiple VCOCs, hedge funds or private equity firms 
must register their status in a database, as the statute requires. 
However, because the detailed procedures for meeting this requirement 
are outlined in the SBIR Policy Directive, and not the rule, SBA 
submitted the information collection to OMB when the Policy Directives 
were submitted for review.

Executive Order 13272

    Pursuant to Executive Order 13272 and the Small Business Jobs Act 
of 2010, Federal agencies issuing final rules are required to discuss 
and give every appropriate consideration to comments received from the 
SBA's Office of Advocacy to the proposed rule. The Office of Advocacy 
submitted a comment letter in response to the proposed rule. In the 
letter, the Office of Advocacy made three recommendations for SBA to 
consider when drafting the final rule.
    First, the Office of Advocacy asked that SBA give full 
consideration to reviewing the comments of the stakeholders regarding 
the time at which a small business concern must self-certify its 
status. SBA had proposed that a small business self-certify its status 
at the time it submits its proposal and at the time of award. As 
discussed above in the preamble, SBA reviewed all the comments 
submitted and in this final rule has retained the current requirement 
that all SBIR/STTR

[[Page 76224]]

awardees must self-certify their eligibility only at the time of award. 
Therefore, SBA did not adopt its proposed rule on this issue.
    Second, the Office of Advocacy stated that SBA should consider 
allowing only the prospective offerors, among others, to file a size 
protest. As discussed in the preamble above, SBA amended Sec.  
121.1001(a)(4) to clarify that offerors, SBA, or the funding agreement 
officer may initiate a size protest or request a formal size 
determination. SBA's proposed rule had stated that prospective or 
current offerors could file a size protest. However, it was not clear 
who or what a prospective offeror would be, but it is clear who an 
actual offeror is--it is someone that actually submitted an offer or 
application in response to an SBIR/STTR solicitation.
    Third, the Office of Advocacy recommended that SBA give full 
consideration to the comments of the stakeholders regarding the 
proposed definition of domestic business concern and its potential 
impact on the SBIR program. As discussed in detail in the preamble, the 
majority of comments received on this rule concerned the ownership and 
control requirements proposed and SBA's proposed definition of the term 
domestic business concern. In reviewing these comments and the concerns 
expressed by the respondents, SBA has issued a final rule that 
restricts foreign ownership in SBIR and STTR awardees and has therefore 
removed as unnecessary the definition of domestic business concern.

Regulatory Flexibility Act, 5 U.S.C., 601-612

    SBA has determined that this final rule may have a significant 
economic impact on a substantial number of small entities within the 
meaning of the Regulatory Flexibility Act (RFA), 5 U.S.C. 601, et seq. 
SBA addressed the impact of this final rule in its Initial Regulatory 
Flexibility Analysis (IRFA), which was part of the proposed rule. SBA 
received one comment that agreed with SBA's analysis and believed that 
the rule will be helpful to small biotechnology companies, which 
typically employ fewer than 50 individuals but together employ over 1.6 
million people. SBA also received a comment from the SBA Office of 
Advocacy. The Office of Advocacy's comments are addressed below.
1. What are the reasons for, and objectives of, this final rule?
    This regulatory action implements several sections of the SBIR/STTR 
Reauthorization Act. These sections of the SBIR/STTR Reauthorization 
Act address affiliation, ownership and control of SBIR and STTR program 
participants.
    The objective of the final rule is to implement these statutory 
changes by further defining terms and expanding on the concepts set 
forth in the SBIR/STTR Reauthorization Act.
2. What is the legal basis for this final rule?
    The legal basis for this final rule is the National Defense 
Authorization Act for Fiscal Year 2012, Section 5001, Division E (cited 
as the SBIR/STTR Reauthorization Act of 2011 or Reauthorization Act), 
Public Law 112-81.
3. What is SBA's description and estimate of the number of small 
entities to which the final rule will apply?
    In FY 2009, for the SBIR program, agencies received 22,444 Phase I 
proposals and 3,352 Phase II proposals. In FY 2009, for the STTR 
program, agencies received 2,804 Phase I proposals and 467 Phase II 
proposals. Some of the proposals submitted were by the same small 
business. However, using these numbers, SBA estimates that 
approximately 24,000 businesses could be impacted by this proposed 
rule. This includes those businesses that are currently not eligible 
under SBA's existing regulations and will become eligible as a result 
of implementation of the SBIR/STTR Reauthorization Act. SBA did not 
receive any comments on the estimated number of businesses that could 
be impacted by the rule.
4. What are the projected reporting, recordkeeping, Paperwork Reduction 
Act and other compliance requirements?
    The proposed rule provided that businesses will need to represent 
their size status at the time of initial offer and award. However, 
based upon the comments received, SBA has issued a final rule stating 
that businesses will represent their size status at the time of award 
only. If there is a size protest, the small business will need to 
ensure it has business records that verify their small business status. 
These are the same documents that a business would keep in the normal 
course of its activities (stock certificates, by-laws etc.).
    SBA explained in the proposed rule that there is a new reporting 
requirement for those businesses that are majority-owned by multiple 
VCOCs, hedge funds or private equity firms. However, SBA addressed that 
reporting requirement and the database used for the reporting, when it 
amended the SBIR policy directive (see 77 FR 46806 (SBIR Policy 
Directive), 77 FR 46855 (STTR Policy Directive)).
5. What relevant federal rules may duplicate, overlap, or conflict with 
this rule?
    This does not conflict with current provisions in SBA's SBIR and 
STTR Policy Directives.
6. What significant alternatives did SBA consider that accomplish the 
stated objectives and minimize any significant economic impact on small 
entities?
    The alternatives SBA considered were those set forth in the 
comments received on the proposed rule and discussed in the preamble.

List of Subjects in 13 CFR Part 121

    Administrative practice and procedure, Government procurement, 
Government property, Loan programs-business, Small businesses.

    For the reasons stated in the preamble, SBA amends 13 CFR part 121 
as follows:

PART 121--SMALL BUSINESS SIZE REGULATIONS

0
1. The authority citation for 13 CFR part 121 is revised to read as 
follows:

    Authority:  15 U.S.C. 632, 634(b)(6), 638, 662, and 694a(9).


0
2. Amend Sec.  121.103 as follows:
0
a. Add a new paragraph (a)(7); and
0
b. Add a new paragraph (b)(8).


Sec.  121.103  How does SBA determine affiliation?

    (a) * * *
    (7) For SBA's Small Business Innovation Research (SBIR) and Small 
Business Technology Transfer (STTR) programs, the bases for affiliation 
are set forth in Sec.  121.702.
    (b) * * *
    (8) These exceptions to affiliation and any others set forth in 
Sec.  121.702 apply for purposes of SBA's SBIR and STTR programs.
* * * * *

0
3. Amend Sec.  121.201 by revising paragraph (b) of footnote 11 at the 
end of the table ``Small Business Size Standards by NAICS Industry,'' 
to read as follows:


Sec.  121.201  What size standards has SBA identified by North American 
Industry Classification System codes?

* * * * *
Small Business Size Standards by NAICS Industry
* * * * *
Footnotes
* * * * *

[[Page 76225]]

    11. * * *
    (b) For purposes of the Small Business Innovation Research (SBIR) 
and the Small Business Technology Transfer (STTR) Programs only, a 
different definition has been established by law. See Sec.  121.702 of 
these regulations.
* * * * *

0
4. Revise the undesignated center heading immediately preceding Sec.  
121.701 to read as follows:
Size and Eligibility Requirements for the Small Business Innovation 
Research (SBIR) and Small Business Technology Transfer (STTR) Programs

0
5. Revise Sec.  121.701 to read as follows:


Sec.  121.701  What SBIR and STTR programs are subject to size and 
eligibility determinations and what definitions are important?

    (a) These sections apply to SBA's SBIR and STTR programs, 15 U.S.C. 
638.
    (b) Definitions.
    (1) Funding agreement officer means a contracting officer, a grants 
officer, or a cooperative agreement officer.
    (2) Funding agreement means any contract, grant or cooperative 
agreement entered into between any Federal agency and any small 
business for the purposes of the SBIR or STTR program.
    (3) Hedge fund has the meaning given that term in section 13(h)(2) 
of the Bank Holding Company Act of 1956 (12 U.S.C. 1851(h)(2)). The 
hedge fund must have a place of business located in the United States 
and be created or organized in the United States, or under the law of 
the United States or of any State.
    (4) Portfolio company means any company that is owned in whole or 
part by a venture capital operating company, hedge fund, or private 
equity firm.
    (5) Private equity firm has the meaning given the term ``private 
equity fund'' in section 13(h)(2) of the Bank Holding Company Act of 
1956 (12 U.S.C. 1851(h)(2)). The private equity firm must have a place 
of business located in the United States and be created or organized in 
the United States, or under the law of the United States or of any 
State.
    (6) Venture capital operating company means an entity described in 
Sec.  121.103(b)(5)(i), (v), or (vi). The venture capital operating 
company must have a place of business located in the United States and 
be created or organized in the United States, or under the law of the 
United States or of any State.

0
6. Revise Sec.  121.702 to read as follows:


Sec.  121.702  What size and eligibility standards are applicable to 
the SBIR and STTR programs?

    To be eligible for award of funding agreements in SBA's SBIR and 
STTR programs, a business concern must meet the requirements below at 
the time of award of an SBIR or STTR Phase I or Phase II funding 
agreement:
    (a) Ownership and control for the SBIR program.
    (1) An SBIR awardee must:
    (i) Be a concern which is more than 50% directly owned and 
controlled by one or more individuals (who are citizens or permanent 
resident aliens of the United States), other business concerns (each of 
which is more than 50% directly owned and controlled by individuals who 
are citizens or permanent resident aliens of the United States), or any 
combination of these;
    (ii) Be a concern which is more than 50% owned by multiple venture 
capital operating companies, hedge funds, private equity firms, or any 
combination of these (for agencies electing to use the authority in 15 
U.S.C. 638(dd)(1)); or
    (iii) Be a joint venture in which each entity to the joint venture 
must meet the requirements set forth in paragraph (a)(1)(i) or 
(a)(1)(ii) of this section. A joint venture that includes one or more 
concerns that meet the requirements of paragraph (a)(1)(ii) of this 
section must comply with Sec.  121.705(b) concerning registration and 
proposal requirements.
    (2) No single venture capital operating company, hedge fund, or 
private equity firm may own more than 50% of the concern.
    (3) If an Employee Stock Ownership Plan owns all or part of the 
concern, each stock trustee and plan member is considered an owner.
    (4) If a trust owns all or part of the concern, each trustee and 
trust beneficiary is considered an owner.
    (b) Ownership and control for the STTR program.
    (1) An STTR awardee must:
    (i) Be a concern which is more than 50% directly owned and 
controlled by one or more individuals (who are citizens or permanent 
resident aliens of the United States), other business concerns (each of 
which is more than 50% directly owned and controlled by individuals who 
are citizens or permanent resident aliens of the United States), or any 
combination of these; or
    (ii) Be a joint venture in which each entity to the joint venture 
must meet the requirements set forth in paragraph (b)(1)(i) of this 
section.
    (2) If an Employee Stock Ownership Plan owns all or part of the 
concern, each stock trustee and plan member is considered an owner.
    (3) If a trust owns all or part of the concern, each trustee and 
trust beneficiary is considered an owner.
    (c) Size and affiliation. An SBIR or STTR awardee, together with 
its affiliates, must not have more than 500 employees. 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. For the purposes of 
the SBIR and STTR programs, the following bases of affiliation apply:
    (1) Affiliation based on ownership. For determining affiliation 
based on equity ownership, a concern is an affiliate of an individual, 
concern, or entity that owns or has the power to control more than 50 
percent of the concern's voting equity. However, SBA may find a concern 
an affiliate of an individual, concern, or entity that owns or has the 
power to control 40% or more of the voting equity based upon the 
totality of circumstances. If no individual, concern, or entity is 
found to control, SBA will deem the Board of Directors to be in control 
of the concern.
    (2) Affiliation arising under stock options, convertible 
securities, and agreements to merge. 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.
    (i) 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.
    (ii) 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.
    (iii) 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.

[[Page 76226]]

    (3) Affiliation based on common management. Affiliation arises 
where the CEO or President of a concern (or other officers, managing 
members, or partners who control the management of the concern) also 
controls the management of one or more other concerns. Affiliation also 
arises where a single individual, concern, or entity that controls the 
board of directors of one concern also controls the board of directors 
or management of one or more other concerns.
    (4) Affiliation based on identity of interest. Affiliation may 
arise among two or more persons (including any individual, concern or 
other entity) with an identity of interest. An individual, concern or 
entity may rebut a determination of identity of interest with evidence 
showing that the interests deemed to be one are in fact separate.
    (i) SBA may presume an identity of interest between family members 
with identical or substantially identical business or economic 
interests (such as where the family members operate concerns in the 
same or similar industry in the same geographic area).
    (ii) SBA may presume an identity of interest based upon economic 
dependence if the SBIR/STTR awardee relies upon another concern or 
entity for 70% or more of its receipts.
    (iii) An SBIR or STTR awardee is not affiliated with a portfolio 
company of a venture capital operating company, hedge fund, or private 
equity firm, solely on the basis of one or more shared investors, 
though affiliation may be found for other reasons.
    (5) Affiliation based on the newly organized concern rule. 
Affiliation may arise where former or current officers, directors, 
principal stockholders, managing members, general partners, 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, general 
partners, 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. A concern will be considered ``new'' for the purpose of this 
rule if it has been actively operating continuously for less than one 
year.
    (6) Affiliation based on joint ventures. Concerns submitting an 
application as a joint venture are affiliated with each other with 
regard to the application. SBA will apply the joint venture affiliation 
exception at Sec.  121.103(h)(3)(iii) for two firms approved to be a 
mentor and prot[eacute]g[eacute] under SBA's 8(a) program.
    (7) Affiliation based on the ostensible subcontractor rule. A 
concern and its ostensible subcontractor are treated as joint 
venturers, and therefore affiliates, for size determination purposes. 
An ostensible subcontractor is a subcontractor or subgrantee that 
performs primary and vital requirements of a funding agreement (i.e., 
those requirements associated with the principal purpose of the funding 
agreement), or a subcontractor or subgrantee upon which the concern is 
unusually reliant. All aspects of the relationship between the concern 
and subcontractor are considered, including, but not limited to, the 
terms of the proposal (such as management, technical responsibilities, 
and the percentage of subcontracted work) and agreements between the 
concern and subcontractor or subgrantee (such as bonding assistance or 
the teaming agreement). To determine whether a subcontractor performs 
primary and vital requirements of a funding agreement, SBA will 
consider whether the concern's proposal complies with the performance 
requirements of the SBIR or STTR program.
    (8) Affiliation based on license agreements. SBA will consider 
whether there is a license agreement concerning a product or trademark 
which is critical to operation of the licensee. The license agreement 
will not cause the licensor to be affiliated with the licensee if the 
licensee has the right to profit from its efforts and bears the risk of 
loss. Affiliation may arise, however, through other means, such as 
common ownership or common management.
    (9) Exception to affiliation for portfolio companies. If a venture 
capital operating company, hedge fund, or private equity firm that is 
determined to be affiliated with an awardee is a minority investor in 
the awardee, the awardee is not affiliated with a portfolio company of 
the venture capital operating company, hedge fund, or private equity 
firm, unless:
    (i) The venture capital operating company, hedge fund, or private 
equity firm owns a majority of the portfolio company; or
    (ii) The venture capital operating company, hedge fund, or private 
equity firms holds a majority of the seats of the board of directors of 
the portfolio company.
    (10) Totality of the circumstances. In determining whether 
affiliation exists, SBA may consider the totality of the circumstances, 
and may find affiliation even though no single factor is sufficient to 
constitute affiliation.
    (d) Calculating ownership and control. SBA will review the small 
business' equity ownership on a fully diluted basis for purposes of 
determining ownership, control and affiliation in the SBIR and STTR 
programs. This means that SBA will consider the total number of shares 
or equity that would be outstanding if all possible sources of 
conversion were exercised, including, but not limited to: Outstanding 
common stock or equity, outstanding preferred stock (on a converted to 
common basis) or equity, outstanding warrants (on an as exercised and 
converted to common basis), outstanding options and options reserved 
for future grants, and any other convertible securities on an as 
converted to common basis.

0
7. Revise Sec.  121.704 to read as follows:


Sec.  121.704  When does SBA determine the size and eligibility status 
of a business concern?

    (a) The size and eligibility status of a concern for the purpose of 
a funding agreement award under the SBIR and STTR programs is 
determined at the time of award for both Phase I and Phase II SBIR and 
STTR awards, or on the date of the request for a size determination, if 
an award is pending.
    (b) A concern that qualified as a small business at the time it 
receives an SBIR or STTR funding agreement is considered a small 
business throughout the life of that specific funding agreement. Where 
a concern grows to be other than small, the funding agreement agency 
may exercise the options on the award that is a contract, grant or 
cooperative agreement or issue a continuation on a grant or cooperative 
agreement and still count the award as an award to a small business 
under the SBIR or STTR program. However, the following exceptions 
apply:
    (1) In the case of a merger or acquisition, the awardee must, 
within 30 days of the transaction becoming final (or the approved 
funding agreement novation if a novation is required), recertify its 
small business size status to the funding agreement agency or inform 
the funding agreement agency that it is other than small. If the 
awardee is other than small, the agency can no longer fund the options 
or issue a continuation pursuant to the funding

[[Page 76227]]

agreement, from that point forward, with SBIR or STTR funds. Funding 
agreement novations for reasons other than a merger or acquisition do 
not necessarily require re-certification. The funding agreement agency 
and the awardee must immediately revise all applicable Federal contract 
and grant databases to reflect the new size status from that point 
forward.
    (2) For the purposes of SBIR and STTR funding agreements with 
durations of more than five years, a funding agreement officer must 
request that a business concern re-certify its small business size 
status no more than 120 days prior to the end of the fifth year of the 
funding agreement, and no more than 120 days prior to exercising any 
option or issuing any continuation. If the awardee certifies that it is 
other than small, the funding agreement agency can no longer fund the 
options or issue a continuation pursuant to the funding agreement with 
SBIR or STTR funds. The funding agreement agency and the awardee must 
immediately revise all applicable Federal contract and grant databases 
to reflect the new size status from that point forward.
    (c) Re-certification does not change the terms and conditions of 
the funding agreement. The requirements in effect at the time of award 
remain in effect throughout the life of the funding agreement.
    (d) A request for a size re-certification shall include the size 
standard in effect at the time of re-certification.

0
8. Revise Sec.  121.705 to read as follows:


Sec.  121.705  Must a business concern self-certify its size and 
eligibility status?

    (a) A business concern must self-certify that it meets the 
eligibility requirements set forth in Sec.  121.702 for a Phase I or 
Phase II SBIR or STTR funding agreement.
    (b) A business concern that is more than 50% owned by multiple 
venture capital operating companies, hedge funds, or private equity 
firms and a joint venture where one or more parties to the joint 
venture is more than 50% owned by multiple venture capital operating 
companies, hedge funds, or private equity firms must be registered with 
SBA as of the date it submits its initial proposal (or other formal 
response) to a Phase I or Phase II SBIR announcement or solicitation. 
The concern must indicate in any SBIR proposal or application that it 
is registered with SBA as majority-owned by multiple venture capital 
operating companies, hedge funds, or private equity firms.
    (c) A small business concern that did not meet the requirements of 
paragraph (b) of this section at the time of its SBIR proposal or 
application must notify the funding agreement officer if, on the date 
of award, the concern is more than 50% owned by multiple venture 
capital operating companies, hedge funds, or private equity firms.
    (1) The concern is still eligible to receive the award if it 
becomes majority-owned by multiple venture capital operating companies, 
hedge funds, or private equity firms after the time it submitted its 
initial proposal (or other formal response) to a Phase I or Phase II 
SBIR announcement or solicitation if the agency makes the award on or 
after the date that is 9 months from the end of the period for 
submitting applications under the SBIR solicitation.
    (2) This small business, known as a covered small business concern, 
would have to certify that it meets the requirements of the SBIR 
program set forth in Sec. Sec.  121.702(a)(1)(ii) or 
121.702(a)(1)(iii), and 121.702(a)(2) and 121.702(c) at the time of 
award of the funding agreement.
    (d) A funding agreement officer may accept a concern's self-
certification as true for the particular funding agreement involved in 
the absence of a written protest or other credible information which 
would cause the funding agreement officer or SBA to question the size 
or eligibility of the concern.
    (e) Procedures for protesting an awardee's self-certification are 
set forth in Sec. Sec.  121.1001 through 121.1009. In adjudicating a 
protest, SBA may address both the size status and eligibility of the 
SBIR or STTR awardee.

0
9. Amend Sec.  121.1001 by revising paragraph (a)(4) as follows:


Sec.  121.1001  Who may initiate a size protest or request a formal 
size determination?

    (a) * * *
    (4) For SBA's Small Business Innovation Research (SBIR) program and 
Small Business Technology Transfer (STTR) program, the following 
entities may protest:
    (i) An offeror or applicant for that solicitation;
    (ii) The funding agreement officer; and
    (iii) The responsible SBA Government Contracting Area Director; the 
Director, Office of Government Contracting; or the Associate 
Administrator, Investment Division.
* * * * *

0
10. Amend Sec.  121.1004 by revising paragraph (b) as follows:


Sec.  121.1004  What time limits apply to size protests?

* * * * *
    (b) Protests by contracting officers, funding agreement officers or 
SBA. The time limitations in paragraph (a) of this section do not apply 
to contracting officers, funding agreement officers or SBA, and they 
may file protests before or after awards, except to the extent set 
forth in paragraph (e) of this section, including for purposes of the 
SBIR and STTR programs. Notwithstanding paragraph (e), for purposes of 
the SBIR and STTR programs the funding agreement officer or SBA may 
file a protest in anticipation of an award.
* * * * *

0
11. Amend Sec.  121.1008 by revising paragraph (a) to read as follows:


Sec.  121.1008  What occurs after SBA receives a size protest or 
request for a formal size determination?

    (a) When SBA receives a size protest, the SBA Area Director for 
Government Contracting, or designee, will notify the contracting 
officer, the protested concern, and the protestor that the protest has 
been received. If the protest pertains to a requirement involving SBA's 
HUBZone program, the Area Director will also notify the D/HUB of the 
protest. If the protest pertains to a requirement set aside for WOSBs 
or EDWOSBs, the Area Director will also notify SBA's Director for 
Government Contracting of the protest. If the protest pertains to a 
requirement involving SBA's SBIR or STTR programs, the Area Director 
will also notify the Associate Administrator, Investment Division. If 
the protest involves the size status of an SDB concern (see part 124, 
subpart B of this chapter) the Area Director will notify SBA's 
Associate Administrator for Business Development. If the protest 
pertains to a requirement that has been reserved for competition among 
eligible 8(a) BD program participants, the Area Director will notify 
the SBA district office servicing the 8(a) concern whose size status 
has been protested. SBA will provide a copy of the protest to the 
protested concern together with SBA Form 355, Application for Small 
Business Size Determination, by certified mail, return receipt 
requested, or by any overnight delivery service that provides proof of 
receipt. SBA will ask the protested concern to complete the form and 
respond to the allegations in the protest.
* * * * *

    Dated: December 18, 2012
Karen G. Mills,
Administrator.
[FR Doc. 2012-30809 Filed 12-26-12; 8:45 am]
BILLING CODE 8025-01-P