Unpacking the SBA’s All Small Mentor-Protégé Program Nick Solosky Partner, Federal Government Contracts & Construction Fox Rothschild LLP DBIA Mid-Atlantic · August 24, 2017

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SBA “All Small” Program Overview Major Policy Shift by the Small Business Administration Vastly expands access to set-aside contracts previously reserved for performance only by small businesses All Government Contractors – Small and Large – need to create a game plan for how to take advantage of this shifting landscape Application Period Open (and has been since October 2016)

SBA “All Small” Program Overview Small Business Protégés may Joint Venture with Large Business Mentors – Without Fear of Affiliation. Including small business set-aside contracts Protégé must qualify as small for the procurement Previously, this Shield from Affiliation was Reserved Only for the SBA’s 8(a) Mentor Protégé Program Now, all small businesses Have the Opportunity to Form SBA Approved Mentor-Protégé Teams with Larger Businesses HUBZone, Women-Owned Small Business (WOSB and EDWOSB), and Service-Disabled Veteran Owned Small Business (SDVOSB)

SBA “All Small” Program Overview Written Mentor-Protégé Agreement is Required Must address how assistance provided will help the protégé firm meet its goals as defined in its business plan The SBA must approve the Joint Venture Team in advance JV Agreement must satisfy the requirements of another new SBA regulation (13 C.F.R. 125.8) SBA also overhauls Mentor-Protégé JV Requirements Certifications & Reports trigger False Claims Act warning

Mentor Protégé All Small Policy Statement: 13 C.F.R. 125.9(a) The small business mentor-protégé program is designed to enhance the capabilities of protégé firms by requiring approved mentors to provide business development assistance to protégé firms and to improve the protégé firms’ ability to successfully compete for federal contracts. This assistance may include technical and/or management assistance; financial assistance in the form of equity investments and/or loans; subcontracts (either from the mentor to the protégé or from the protégé to the mentor); trade education; and/or assistance in performing prime contracts with the Government through joint venture arrangements. Mentors are encouraged to provide assistance relating to the performance of contracts set aside or reserved for shall business so that the protégé firms may more fully develop their capabilities.

The Final Rule – The Basics 81 FR 48557 (Effective August 24, 2016) One for 8(a) BD and One for All Other Small Businesses Joint Venture Agreement Must be in Writing The End of Populated Joint Ventures Joint Venture must be separately identified in SAM All Mentor-Protégé Teams will be Approved by the Office of Business Development

The Final Rule – Business Requirements Mentor must demonstrate that it can fulfill its mentor protégé obligations (good financial condition) Generally, a Mentor will have no more than one protégé at a time SBA may authorize additional (if no adverse impact) Under no circumstances more than three protégés at one time Small business may be both a protégé and a mentor at the same time Protégés must qualify as small for primary NAICS or secondary NAICS Protégé may have up to two mentors in its lifetime in any program

The Final Rule – Business Requirements 8(a) mentor/protégé may notify SBA that it is transferring relationship to All Small Mentor-Protégé relationship after graduation Mentors may own 40% of Protégé – Not required to divest at end of relationship Mentor may transfer relationship to purchaser Size of an approved Joint Venture may be protested

The Final Rule - Proposals Relationship lasts 3 years with 3-year extension, but reviewed annually to ensure Protégé is receiving identified assistance and check self-performance requirements Past Performance and Experience of Joint Venture members must be considered during procurement Protégé must identify all other Mentor-Protégé relationships in proposal At the conclusion of a relationship, Protégé firm must report on the relationship and long term benefits

The Final Rule - Performance Joint Venture Performance Requirements Protégé must perform 40% of work performed by Joint Venture, Joint Venture must certify compliance with performance requirements, and report to SBA and Agency on performance All Mentors must be for-profit

The Final Rule - Consequences Certification Requirements (False Claims Act) Mentor that fails to provide assistance indicated in JV Agreement: May result in termination of the Agreement Mentor prohibited from acting as mentor for period of time SBA may request for Agency to stop work and/or allow Protégé to perform Exclusion proceedings

The Final Rule – Misc. SBA does not currently certify small, WOSB, or SDVO – but status can be protested in connection with procurement SBA will not review All Small Mentor-Protégé Joint Venture Agreements – but JV structure can be protested in connection with procurement Once “small” partner qualifies as other than small for the size standard for primary NAICS code, it will not be eligible for any further contracting benefits from its Mentor-Protégé relationship

Joint Venture Requirements Every JV Agreement to perform a contract set aside or reserved for small business between a protégé small business and it’s SBA-approved mentor authorized by § 125.9 or § 124.520 of this chapter must contain a provision: (i) Setting forth the purpose of the joint venture (ii) Designating a small business as the managing venturer of the joint venture, and an employee of the small business managing venture as the project manager responsible for performance of the contract The individual identified as the project manager of the joint venture need not be an employee of the small business at the time the joint venture submits an offer, but, if he or she is not, there must be a signed letter of intent that the individual commits to be employed by the small business if the joint venture is the successful offeror The individual identified as the project manager cannot be employed by the mentor and become an employee of the small business for purposes of performance under the joint venture

Joint Venture Requirements (iii) Stating that with respect to a separate legal entity joint venture, the small business must own at least 51% of the joint venture entity (iv) Stating that each participant must receive profits from the joint venture commensurate with the work performed by the concern (v) Providing for the establishment and administration of a special bank account in the name of the joint venture. This account must require the signature of all parties to the joint venture or designees for withdrawal purposes. All payments due the joint venture for performance on a contract set aside or reserved for small business will be deposited in the special account; all expenses incurred under the contract will be paid from the account as well

Joint Venture Requirements (vi) Itemizing all major equipment, facilities, and other resources to be furnished by each party to the joint venture, with a detailed schedule of cost or value of each, where practical If a contract is indefinite in nature, such as an indefinite quantity contract or a multiple award contract where the level of effort or scope of work is not known, the joint venture must provide a general description of the anticipated major equipment, facilities, and other resources to be furnished by each party to the joint venture, without a detailed schedule of cost or value of each, or in the alternative, specify how the parties to the joint venture will furnish such resources to the joint venture once a definite scope of work is made publicly available.

Joint Venture Requirements (vii) Specifying the responsibilities of the parties with regard to negotiation of the contract, source of labor, and contract performance, including ways that the parties to the joint venture will ensure that the joint venture and small business partner(s) to the joint venture will meet the performance of work requirements set forth in paragraph (d) of this section, where practical. If a contract is indefinite in nature, such as an indefinite quantity contract or a multiple award contract where the level of effort or scope of work is not known, the joint venture must provide a general description of the anticipated responsibilities of the parties with regard to negotiation of the contract, source of labor, and contract performance, not including the ways that the parties to the joint venture will ensure that the joint venture and the small business partner(s) to the joint venture will meet the performance of work requirements set forth in paragraph (d) of this section, or in the alternative, specify how the parties to the joint venture will define such responsibilities once a definite scope of work is made publicly available

Joint Venture Requirements (viii) Obligating all parties to the joint venture to ensure performance of the contract set aside or reserved for small business and to complete performance despite the withdrawal of any member (ix) Designating that accounting and other administrative records relating to the joint venture be kept in the office of the small business managing venture, unless approval to keep them elsewhere is granted by the District Director or his/her designee

Joint Venture Agreement (x) Requiring that the final original records be retained by the small business managing venture upon completion of any contract set aside or reserved for small business that was performed by the joint venture (xi) Stating that quarterly financial statements showing cumulative contract receipts and expenditures (including salaries of the joint venture’s principals) must be submitted to SBA not later than 45 days after each operating quarter of the joint venture; and (xii) Stating that a project-end profit and loss statement, including a statement of final profit distribution, must be submitted to SBA no later than 90 days after completion of the contract

Recent Litigation Developments Size Appeal of Precision Management Corp., SBA No. SIZ-5781 (Sept. 29, 2016) Issue: Where the joint venture agreement is non-compliant at time of offer, but the joint venture amends its agreement prior to award to bring the agreement into compliance, can SBA consider the amendments in determining the joint venture’s eligibility for award? Holding: No. Eligibility is determined at date of offer. If the joint venture includes a large business mentor, the joint venture will be ineligible for a set-aside.

Final Thoughts The Unknown: Translation from on-paper to in-practice We anticipate that small businesses (including SDVOSBs, HUBZones, and WOSBs) will face heavily increased competition on set-aside contracts from peers now backed by the support and assistance of a large business Strategic Considerations: Access to Set-Aside Programs Left Out in the Cold without a Dance Partner?

Nick Solosky nsolosky@foxrothschild.com 202-696-1460