In this second part of our blog series about the July 25, 2016 SBA final rule implementing numerous changes to multiple SBA regulations and establishing a new small business Mentor-Protégé Program (SB MPP), we address how such implementation impacts the parallel 8(a) Business Development mentor-protégé program (8(a) MPP).  As the final rule points out, the 8(a) MPP will remain intact; however, the SBA has made several changes to the regulations governing that program, which largely represent the SBA’s efforts to harmonize the two programs.  The paragraphs below discuss some of these changes, including those impacting the requirements for entry, ongoing reviews and terminations, and reporting obligations.

Requirements for Entry into the 8(a) MPP

With the creation of the SB MPP, companies qualifying as an 8(a) have the option to participate in either the 8(a) or the SB MPP. Any current or future participant in the 8(a) MPP should be aware of the final rules’ numerous changes to this program, as discussed below.

Additions to the Written Mentor-Protégé Agreement

As drafted, the current regulations do not require the protégé to identify any other Mentor-Protégé Agreement (MPA) to which it is a party. However, to ensure that the protégé gains “business development assistance that it otherwise would not be able to obtain[,]” the final rule adds a requirement that the MPA “identify how the assistance to be provided by the proposed mentor is different from assistance provided…through another mentor-protégé relationship….”

Eligibility for Mentors Restricted

For companies interested in becoming mentors under the 8(a) MPP, the final rule implements three major changes affecting eligibility, two of which impact the type of entities that can serve as mentors (or would-be mentors) and the third of which clarifies the number of protégés that a mentor may have. First, the current regulations permit for-profit and non-profit entities to serve as mentors for the 8(a) MPP.  However, to align the requirements of the 8(a) MPP with the requirements of the 2013 NDAA and new SB MPP, the SBA has changed such criteria to permit only for-profit businesses to serve as mentors in the 8(a) MPP.

Second, while the current regulations require a mentor to demonstrate it possesses “favorable financial health” through the mandatory submission to the SBA of its federal tax returns for the prior three years, possess good character, and not be suspended or debarred, the final rule explains that, with respect to the first element, a mentor must only show they are “capable of carrying out its responsibilities to assist the protégé firm under the proposed mentor-protégé agreement” and, to this end, may submit such tax returns to the SBA.

Third, the new rules clarifies that a mentor may not have more than three protégés at one time in the aggregate between the 8(a) and SB MPPs. As such, companies should consider carefully, which programs to participate in and with whom.

Eligibility for 8(a) MPP Protégés Relaxed

With respect to protégés, the current SBA regulations impose restrictions that do not permit all 8(a) contractors to qualify as protégés, formerly limiting participation to 8(a) companies that are in the very early stages of the 8(a) program or whose size is less than half that tied to their primary NAICS code. To conform the 8(a) and SB MPP rules, the SBA relaxed the 8(a) standards governing the qualifications of protégés.  Specifically, a participant now may qualify as a protégé where it:

• Qualifies “as small for the size standard corresponding to its primary NAICS code” or identifies “that it is seeking business development assistance with respect to a secondary NAICS code and qualif[ies] as small for the size standard corresponding to that NAICS code; and”
• “Demonstrate[s] how the business development assistance to be received through its proposed mentor-protégé relationship would advance the goals and objectives set forth in its business plan.”

The final rule also now permits the SBA to authorize a company to be both a protégé and a mentor simultaneously if the company can demonstrate that the second MPP relationship will not compete or conflict with the first.

New Requirements for Joint Ventures

The revised 8(a) MPP now includes parallel requirements for joint ventures as discussed in the first blog post in this series, including: (1) the ability to establish formal or informal joint ventures; (2) joint ventures must be reduced to writing; (3) joint ventures as separate legal entities may not be populated with personnel performing the contracts; (4) joint ventures must be identified in SAM with separate CAGE and DUNS numbers, identified as a joint venture, and joint venture partners identified; and (5) project managers cannot be an employee of the mentor and become a protégé employee for purposes of the joint venture.

Importantly, with the new regulatory changes, 8(a) MPP joint ventures are no longer “protest proof.” The final rule provides that an interested party may protest the size of an SBA-approved 8(a) joint venture for competitive 8(a) contracts, thereby altering the rule established by SBA’s Office of Hearings and Appeals in Size Appeal of Goel Services, Inc. and Grunley/Goel Joint Venture D LLC, SBA No. SIZ-5320 (2012).

Transfers between Mentor-Protégé Programs

Under the final rule, the SBA will now permit an 8(a) firm graduating or otherwise leaving the 8(a) program that continues to qualify as a small business to “transfer its 8(a) mentor-protégé relationship to a small business mentor-protégé relationship.” All that is required is notice to the SBA of the intent to transfer; no formal application or SBA approval is required.  As a result of this change, the SBA will remove the current prohibition on approving “a mentor/protégé relationship for an 8(a) Participant with less than six months remaining in its program term.”

If such a transfer occurs, a joint venture may certify as small for any Government contract or subcontract as long as the protégé (and/or the joint venture) has not been determined to be other than small for the size standard corresponding to the procurement. A contract awarded to such joint venture continues to qualify as an award to a small business for the life of the contract unless the contract exceeds five years (including options), in which case, periodic recertification is required.  Once the protégé becomes other than small, the receipts and/or employees of the protégé and mentor will be aggregated in determining the size of the MPP joint venture going forward.

The protégé also has the option of terminating an existing agency MPA and transferring the assistance to the 8(a) MPP relationship. As the rule points out, small businesses with preexisting MPAs electing to transfer such assistance must ensure that the assistance has not yet been provided given that the “SBA continues to believe that assistance that has already been provided or pledged in a MPA of another agency should not be used as the basis for an SBA MPA.”

Ongoing Reviews and Termination

In addition to providing for an annual review of MPAs, the final rule clarifies that, unless rescinded in writing, the MPA will automatically renew for up to three years, without a notice requirement. Despite this initial three-year limit, the term “may be extended for a second three years[,]” meaning the MPA can endure for up to a total of six years.  Where a protégé has MPAs with different mentors, the SBA also will permit three-year extensions of such agreements if the protégé has received the agreed-upon assistance and will continue to receive additional assistance under the MPA.

Notably, pursuant to the final rule, a change in control of the mentor will not impact the duration of the agreement, so long as the mentor, after the change in control, “expresses in writing to SBA that it acknowledges the [MPA] and certifies that it will continue to abide by its terms.”

Of course, the SBA may terminate the MPA at any time per the provisions existing at 13 C.F.R. § 124.520(h), and now through a supplemental termination provision in the final rule, which provides the SBA a termination right if it determines that the protégé is not “adequately benefiting from the relationship or that the parties are not complying with any term or condition of the [MPA].” Mentors and protégés should remember that, even if the SBA terminates the relationship, the joint venture is required to complete any previously awarded contract unless a stop work order is issued.

New Reporting Obligations for Protégés

Under the existing regulations, the protégé must annually report certain data points to the SBA for the protégé’s preceding program year (e.g. technical assistance the mentor provided to the protégé and subcontracts the mentor awarded to the protégé), but there is no express requirement for protégés to submit a report upon completion of the program. See 13 C.F.R. § 124.520(g).  The final rule, however, will now require protégés at MPA conclusion to report to the SBA whether the relationship was beneficial and describe any lasting benefits to the protégé, and failure to do so will result in the SBA not approving a subsequent mentor-protégé relationship under either the 8(a) or SB MPPs.

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Despite a few program-specific requirements tied to the unique status of the protégés under the 8(a) program, the SBA’s final rule largely synchronizes the operation and requirements for 8(a) and SB MPPs. Current participants in the 8(a) MPP should familiarize themselves with the changes for developing potential new relationships, as well as how performance and reporting under existing MPAs could be impacted.