THE SMALL BUSINESS ADMINISTRATION MENTOR-PROTÉGÉ PROGRAM: WHAT IT IS, HOW TO USE IT TO YOUR ADVANTAGE, AND RECENT DEVELOPMENTS E DWARD T. D E L ISLE, E SQ. fo r National 8(a) Association February 12, 2014 Presented By :

WHAT IS THE SMALL BUSINESS ADMINISTRATION’S MENTOR-PROTÉGÉ PROGRAM? 13 C.F.R. § (a) Program Only (for now…) This mentoring program is offered under SBA’s 8(a) Business Development program serving disadvantaged firms. SBA’s 8(a) program, named for a section of the Small Business Act, is a business development initiative that helps socially and economically disadvantaged Americans gain access to economic opportunity. The program provides an avenue for disadvantaged Americans to achieve entrepreneurial success and contribute to the strength and vigor of our economy. Purpose: Enhance the capabilities of the protégé, assist the protégé with meeting the goals established in its SBA-approved business plan, and to improve its ability to successfully compete for contracts. 2

WHAT IS THE MENTOR-PROTÉGÉ PROGRAM? The program encourages private-sector relationships and expands SBA’s efforts to identify and respond to the developmental needs of 8(a) clients. Specifically, the Mentor-Protégé program is designed to encourage approved mentors to provide various forms of business development assistance to 8(a) protégé firms. The program enhances the capability of 8(a) participants to compete more successfully for federal government contracts through this assistance. 3

WHAT IS THE MENTOR-PROTÉGÉ PROGRAM? Benefits of SBA’s Mentor-Protégé program: The SBA's Mentor-Protégé Program is great way for both mentor and protégé to become more successful and grow as a small business. Under SBA’s Mentor-Protégé program, protégés can gain the following benefits: Technical and management assistance – The mentor’s expertise, resources, and capabilities are made available to the protégé. Prime contracting – Mentors can enter into joint-venture arrangements with protégés to compete for government contracts. Financial assistance in the form of equity or loans – Mentors can own equity interest of up to 40% in a protégé firm to help it raise capital. Qualification for other SBA programs - A protégé can obtain other forms of SBA assistance as the result of its good standing in the Mentor-Protégé program 4

WHAT IS THE MENTOR-PROTÉGÉ PROGRAM? Benefits of SBA’s Mentor-Protégé program, (cont.): Provided you follow the regulations and structure your mentor protégé relationship correctly, no affiliation issues!! 13 CFR How does SBA determine affiliation? Exceptions to affiliation coverage: An 8(a) BD Participant that has an SBA-approved mentor/protégé agreement is not affiliated with a mentor firm solely because the protégé firm receives assistance from the mentor under the agreement. Similarly, a protégé firm is not affiliated with its mentor solely because the protégé firm receives assistance from the mentor under a Federal Mentor-Protégé program where an exception to affiliation is specifically authorized by statute or by SBA under the procedures set forth in § Affiliation may be found in either case for other reasons. 5

MENTOR PROTÉGÉ PROGRAM ELIGIBILITY WHO IS ELIGIBLE TO BE A MENTOR? Controlled by 13 C.F.R (b) Generally, any concern or non-profit entity that demonstrates a commitment and the ability to assist developing 8(a) Participants may act as a mentor. In order to qualify as a mentor, a concern must demonstrate that it: Possesses favorable financial health; Possesses good character; Does not appear on the federal list of debarred or suspended contractors; and Can impart value to a protégé firm due to lessons learned and practical experience gained because of the 8(a) BD program, or through its knowledge of general business operations and government contracting. 6

MENTOR PROTÉGÉ PROGRAM ELIGIBILITY WHO IS ELIGIBLE TO BE A MENTOR? In order to demonstrate its favorable financial health, a firm seeking to be a mentor must submit to SBA for review copies of the Federal tax returns it submitted to the IRS, or audited financial statements, including any notes, or in the case of publicly traded concerns the filings required by the Securities and Exchange Commission for the past three years. Once approved, a mentor must annually certify that it continues to possess good character and a favorable financial position. 7

MENTOR PROTÉGÉ PROGRAM ELIGIBILITY WHO IS ELIGIBLE TO BE A MENTOR? Generally a mentor will have no more than one protégé at a time. However, the AA/BD may authorize a concern or non-profit entity to mentor more than one protégé at a time where it can demonstrate that the additional mentor/protégé relationship will not adversely affect the development of either protégé firm (e.g., the second firm may not be a competitor of the first firm). Under no circumstances will a mentor be permitted to have more than three protégés at one time 8

MENTOR PROTÉGÉ PROGRAM ELIGIBILITY WHO IS ELIGIBLE TO BE A PROTÉGÉ? In order to initially qualify as a protégé firm, a Participant must: (i) Be in the developmental stage of program participation; or (ii) Have never received an 8(a) contract; or (iii) Have a size that is less than half the size standard corresponding to its primary NAICS code. Only firms that are in good standing in the 8(a) BD program (e.g., firms that do not have termination or suspension proceedings against them, and are up to date with all reporting requirements) may qualify as a protégé. SBA will not approve a mentor/protégé relationship for an 8(a) Participant with less than six months remaining in its program term. 9

MENTOR PROTÉGÉ PROGRAM ELIGIBILITY WHO IS ELIGIBLE TO BE A PROTÉGÉ? A protégé firm may generally have only one mentor at a time. The AA/BD may approve a second mentor for a particular protégé firm where the second relationship will not compete or otherwise conflict with the business development assistance set forth in the first mentor/protégé relationship and either: (i) The second relationship pertains to a, secondary NAICS code; or (ii) The protégé firm is seeking to acquire a specific expertise that the first mentor does not possess. A protégé may not become a mentor and retain its protégé status. The protégé must terminate its mentor/protégé agreement with its mentor before it will be approved as a mentor to another 8(a) Participant. 10

HOW DOES A FIRM ENTER THE PROGRAM? STEP 1: MENTOR AND PROTÉGÉ DRAFT WRITTEN AGREEMENT The mentor and protégé firms must enter a written agreement setting forth an assessment of the protégé's needs and providing a detailed description and timeline for the delivery of the assistance the mentor commits to provide to address those needs (e.g., management and/or technical assistance, loans and/or equity investments, cooperation on joint venture projects, or subcontracts under prime contracts being performed by the mentor). The mentor/protégé agreement must: (i) Address how the assistance to be provided through the agreement will help the protégé firm meet the goals established in its SBA-approved business plan; (ii) Establish a single point of contact in the mentor concern who is responsible for managing and implementing the mentor/protégé agreement; and (iii) Provide that the mentor will provide such assistance to the protégé firm for at least one year. The agreement must also provide that either the protégé or the mentor may terminate the agreement with 30 days advance notice to the other party to the mentor/protégé relationship and to SBA. 11

HOW DOES A FIRM ENTER THE PROGRAM? STEP 2: EVALUATION OF WRITTEN AGREEMENT After it is finished, the written agreement must be submitted to, and evaluated and approved by, the AA/BD. The agreement will not be approved if: SBA determines that the assistance to be provided is not sufficient to promote any real developmental gains to the protégé; or SBA determines that the agreement is merely a vehicle to enable the mentor to receive 8(a) contracts. SBA must approve all changes to a mentor/protégé agreement in advance. SBA will review the mentor/protégé relationship annually to determine whether to approve its continuation for another year. 12

HOW DOES A FIRM ENTER THE PROGRAM? STEP 2: EVALUATION OF WRITTEN AGREEMENT WHAT IF YOUR BUSINESS IS NOT APPROVED FOR THE MENTOR PROTÉGÉ PROGRAM? Where SBA declines to approve a specific mentor/protégé agreement, the protégé may request the AA/BD to reconsider the Agency's initial decline decision by filing a request for reconsideration with its servicing SBA district office within 45 calendar days of receiving notice that its mentor/protégé agreement was declined. The protégé may revise the proposed mentor/protégé agreement and provide any additional information and documentation pertinent to overcoming the reason(s) for the initial decline to its servicing district office. 13

WHAT IF YOUR BUSINESS IS NOT APPROVED FOR THE MENTOR PROTÉGÉ PROGRAM? APPEAL PROCESS The AA/BD will issue a written decision within 45 calendar days of receipt of the protégé's request. The AA/BD may approve the mentor/protégé agreement, deny it on the same grounds as the original decision, or deny it on other grounds. If denied, the AA/BD will explain why the mentor/protégé agreement does not meet the requirements of § and give specific reasons for the decline If the AA/BD declines the mentor/protégé agreement solely on issues not raised in the initial decline, the protégé can ask for reconsideration as if it were an initial decline. If SBA's final decision is to decline a specific mentor/protégé agreement, the 8(a) firm seeking to be a protégé cannot attempt to enter another mentor/protégé relationship with the same mentor for a period of 60 calendar days from the date of the final decision. The 8(a) firm may, however, submit another proposed mentor/protégé agreement with a different proposed mentor at any time after the SBA's final decline decision. 14

HOW DOES A FIRM ENTER THE PROGRAM? STEP 3: CONTINUED MONITORING In its annual business plan update required by § (a,) the protégé must report to SBA for the protégé's preceding program year: (i) All technical and/or management assistance provided by the mentor to the protégé; (ii) All loans to and/or equity investments made by the mentor in the protégé; (iii) All subcontracts awarded to the protégé by the mentor, and the value of each subcontract; (iv) All federal contracts awarded to the mentor/protégé relationship as a joint venture (designating each as an 8(a), small business set aside, or unrestricted procurement), the value of each contract, and the percentage of the contract performed and the percentage of revenue accruing to each party to the joint venture; and (v) A narrative describing the success such assistance has had in addressing the developmental needs of the protégé and addressing any problems encountered. 15

HOW DOES A FIRM ENTER THE PROGRAM? STEP 3: CONTINUED MONITORING In addition to the requirements relating to § (a) annual business plan: The protégé must report the mentoring services it receives by category and hours. The protégé must annually certify to SBA whether there has been any change in the terms of the agreement. SBA will review the protégé's report on the mentor/protégé relationship as part of its annual review of the firm's business plan pursuant to § SBA may decide not to approve continuation of the agreement if it finds that the mentor has not provided the assistance set forth in the mentor/protégé agreement or that the assistance has not resulted in any material benefits or developmental gains to the protégé

HOW DOES A FIRM ENTER THE PROGRAM? STEP 3: CONTINUED MONITORING In addition, the SBA will also continue to monitor the mentor/protégé relationship to ensure that the purpose of the program is being fulfilled. Where SBA determines that a mentor has not provided to the protégé firm the business development assistance set forth in its mentor/protégé agreement, SBA will notify the mentor of such determination and afford the mentor an opportunity to respond. The mentor must respond within 30 days of the notification, explaining why it has not provided the agreed upon assistance and setting forth a definitive plan as to when it will provide such assistance. If the mentor does not respond, it faces some serious consequences…. 17

HOW DOES A FIRM ENTER THE PROGRAM? STEP 3: CONTINUED MONITORING If the mentor fails to respond, does not supply adequate reasons for its failure to provide the agreed upon assistance, or does not set forth a definite plan to provide the assistance: SBA will terminate its mentor/protégé agreement; The firm will be ineligible to again act as a mentor for a period of two years from the date SBA terminates the mentor/protégé agreement; and The SBA may recommend to the relevant procuring agency to issue a stop work order for each Federal contract for which the mentor and protégé are performing as a small business joint venture pursuant to paragraph (d)(1) of this section in order to encourage the mentor to comply with its mentor/protégé agreement. Where a protégé firm is able to independently complete performance of any such contract, SBA may also authorize a substitution of the protégé firm for the joint venture. 18

HOW DOES A FIRM ENTER THE PROGRAM? STEP 3: CONTINUED MONITORING SBA may consider a mentor's failure to comply with the terms and conditions of an SBA-approved mentor/protégé agreement as a basis for debarment on the grounds, including but not limited to, that the mentor has not complied with the terms of a public agreement under 2 CFR (b) (b) 19

ARE THERE OTHER MENTOR PROTÉGÉ PROGRAMS? 20 In addition to the SBA’s program, there are several agency specific mentor-protégé programs. Some are: Department of Defense (DoD) Mentor-Protégé Program Department of Veterans Affairs (VA) Mentor-Protégé Program Department of Homeland Security (DHS) Mentor-Protégé Program Department of Energy (DOE) Mentor-Protégé Program NASA Mentor-Protégé Program USAID Mentor-Protégé Program Department of the Treasury Mentor-Protégé Program Department of State Mentor-Protégé Program.

ARE THERE OTHER MENTOR PROTÉGÉ PROGRAMS? 21 Each of these agency specific programs has its own rules, its own benefits and drawbacks. For example, with the exception of the DoD Program, most don’t get you around the affiliation issue. However, many are open to other types of small businesses, not just 8(a). In addition to these agency specific programs, as I will discuss in the “Recent Developments” section, the SBA may be developing mentor-protégé programs for VOSB/SDVOSB, HUBZone, WOSB/EDWOSB, etc. pursuant to the 2013 NDAA.

RECENT DEVELOPMENTS AFFILIATION Size Appeal of Patriot Construction, Inc., SBA No. SIZ-5439 Award to the mentor of a mentor/protégé team was protested by competitor. Competitor alleged that the mentor and protégé were affiliated, and therefore, not small. SBA Area office found that there were ties between the mentor and the protégé, but found that they were not affiliated due to their mentor protégé relationship. The SBA Area office found that the mentor/protégé relationship precluded a finding of affiliation. On appeal, SBA OHA disagreed. It found that SBA regulations do not establish a total exception from affiliation for 8(a) mentors and protégés; rather, 13 C.F.R. § (b)(6), states that “[a]n 8(a) BD Participant” is not affiliated with its mentor “solely because the protégé firm receives assistance from the mentor under the agreement.” However, “[a]ffiliation may be found for other reasons.”13 C.F.R. § (b)(6) 22

RECENT DEVELOPMENTS AFFILIATION Size Appeal of Patriot Construction, Inc., SBA No. SIZ-5439 In Patriot, the principals of the companies were brothers, the protégé had subcontracted to the mentor twice, and the companies had engaged in four joint ventures. It was also alleged that they shared the same address. Moreover, OHA found that the companies “appear to have freely shared their employees” and that such sharing went “well beyond that required to perform the joint ventures…” OHA found that the SBA area office had erred in finding that the mentor protégé relationship automatically precluded a finding of affiliation. OHA remanded the case to the SBA for consideration of “whether the extensive sharing of employees between the two concerns, outside of the contracts the approved joint ventures performed, was beyond the scope of assistance provided under the mentor/protégé agreement, and thus constituted a basis for finding affiliation between the [mentor and protégé] for other reasons.” 23

RECENT DEVELOPMENTS AFFILIATION Size Appeal of Patriot Construction, Inc., SBA No. SIZ-5439 The takeaway? This case makes it clear that OHA does not consider the mentor-protégé program a free pass. If you are using the program correctly, it should shield you from a finding of affiliation based on the ties formed as a part of the mentor/protégé relationship…but it will not protect you from a finding of affiliation based on things that would, independently, constitute an affiliation. 24

RECENT DEVELOPMENTS 2013 NDAA Small Business Jobs Act of 2010 authorized the SBA to establish mentor/protégé programs for its VOSB/SDVOSB, HUBZone, and WOSB/EDWOSB small business programs. However, the SBA did not issue regulations to establish the programs. In an effort to again prompt the SBA to enact more programs, Section 1641 of the 2013 Fiscal Year National Defense Authorization Act: Authorizes the SBA to establish a mentor/protégé program for all small business concerns; AND Encourages the SBA to issue regulations to establish these programs sooner rather than later 25

RECENT DEVELOPMENTS 2013 NDAA Common errors about the NDAA and what it said about the mentor/protégé program: The NDAA does not REQUIRE the SBA to enact these programs; it merely authorizes it. Any programs the SBA establishes will likely be modeled on the 8(a) program, but do not need to be identical. The NDAA does not require the SBA to enact regulations relating to the new mentor/protégé programs, if any, within 270 days. The 270 day requirement refers to the mentor/protégé programs of other agencies… 26

RECENT DEVELOPMENTS 2013 NDAA NDAA also likely to unify the mentor/protégé requirements across the different individual mentor/protégé programs of individual agencies, as discussed above. Pursuant to the NDAA: A Federal department or agency may not carry out a mentor/protégé program for small business concerns unless the head of that agency submits a plan to the SBA, and the SBA approves it. Approval will be based on whether the program will assist protégés in competing for Federal prime contracts, and whether it complies with regulations to be issued by the SBA. The SBA shall issue those regulations within 270 days. In effect, Congress has instructed the SBA to create uniform requirements for other agencies’ mentor/protégé programs. This should ensure consistency. 27

Questions? 28

29 Edward T. DeLisle, Esq. Cohen Seglias Pallas Greenhall & Furman PC 30 S. 17 th St., 19 th Floor Philadelphia, PA (Twitter)