1. Legal and Practical Considerations in Structuring and Managing a NHO and its subsidiary 8(a) Concerns
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NHOA 2016 Business Summit –

2. INTRODUCTION Shannon Edie Daphne Tong-Pave
Holomua Consulting Group, LLC (Holomua) is a small, woman-owned business located in Honolulu, Hawaii. Our full-service, solution-oriented consulting firm focuses on assisting businesses with maximizing small business opportunities, navigating the complex legal and compliance landscape of federal government contracting, and developing its tools and knowledge to excel at government contracting.
Shannon Edie
President & Senior Consultant
Daphne Tong-Pave
Vice President & Senior Consultant
INTRODUCTION
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3. Agenda WHAT IS A NATIVE HAWAIIAN ORGANIZATION (NHO)
ELIGIBILITY REQUIREMENTS:
OWNERSHIP AND CONTROL, SIZE, POTENTIAL FOR SUCCESS, & GOOD CHARACTER
SOCIAL & ECONOMIC DISADVANTAGE
DIFFERENCES BETWEEN NHOs, ANCs, and TRIBES
BENEFITS
SPECIAL RULES AND ISSUES APPLICABLE TO NHOS
MULTIPLE SUBSIDIARIES
AFFILIATION
FOLLOW-ON CONTRACTS
COMMON CHALLENGES
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4. WHAT IS A NHO? NHO For-profit firm 8(a) firm
NATIVE HAWAIIAN ORGANIZATION (NHO) - “any community service organization serving Native Hawaiians in the State of Hawaii which is a not-for-profit organization chartered by the State of Hawaii, is controlled by Native Hawaiians, and whose business activities will principally benefit such Native Hawaiians.” [13 CFR 124.3]
For-profit firms owned by NHOs are eligible for the SBA 8(a) BD program, under different rules
Unlike businesses owned by individuals, proceeds from businesses owned by NHOs go back to the Native Hawaiian community
NHO
For-profit firm
8(a) firm
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5. Eligibility requirements
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6. ELIGIBILITY REQUIREMENTS
OWNERSHIP & CONTROL
NHO must be majority owner (i.e. 51%)
NHO must control for-profit firm (i.e. NHO must control the for-profit Board of Directors)
NHO cannot own 51% or more of another business (either at the time of application or for the previous two years) that is in the 8(a) program under the same primary NAICS code of the applicant
Day-to-day operations do not need to be managed by socially and economically disadvantaged individual(s)
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7. ELIGIBILITY REQUIREMENTS
SIZE
NHO-owned business must be small and meet standards under 13 CFR 121
Exceptions to affiliation rules apply for NHOs and its for-profit firms. In general, affiliation will not be found based on common ownership, management, and common administrative services
POTENTIAL FOR SUCCESS
To request a waiver of the two-year-in-business requirement, a NHO may make a “firm written commitment” to support its for-profit subsidiary
GOOD CHARACTER
All Board members, owners, officers, directors, and entities must demonstrate good character
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8. SOCIAL & ECONOMIC DISADVANTAGE
Native Hawaiians are presumed to be socially disadvantaged
OLD RULE - To determine whether an NHO is economically disadvantaged, SBA considers the status of the NHO’s members/directors
Majority of an NHO’s members/directors must be Native Hawaiian AND economically disadvantaged
An NHO must establish economic disadvantage each time its for profit subsidiary applies for the 8(a) program
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9. SOCIAL & ECONOMIC DISADVANTAGE
NEW RULE -13 CFR (c)(1) In order to establish that an NHO is economically disadvantaged, it must demonstrate that it will principally benefit economically disadvantaged Native Hawaiians. To do this, the NHO must provide data showing the economic condition of the Native Hawaiian community that it intends to serve, including:
(i) The number of Native Hawaiians in the community that the NHO intends to serve;
(ii) The present Native Hawaiian unemployment rate of those individuals;
(iii) The per capita income of those Native Hawaiians, excluding judgment awards;
(iv) The percentage of those Native Hawaiians below the poverty level; and
(v) The access to capital of those Native Hawaiians.
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10. SOCIAL & ECONOMIC DISADVANTAGE
NEW RULE -13 CFR (c)…. Once an NHO establishes that it is economically disadvantaged in connection with the application of one NHO-owned firm, it need not reestablish such status in order to have other businesses that it owns certified for 8(a) BD program participation, unless specifically requested to do so by the AA/BD. If a different NHO identifies that it will serve and benefit the same Native Hawaiian community as an NHO that has already established its economic disadvantage status, that NHO need not establish its economic disadvantage status in connection with an 8(a) BD application of a business concern that it owns, unless specifically requested to do so by the AA/BD.
SOCIAL & ECONOMIC DISADVANTAGE
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11. Differences between native entities
Alaska Native Corporations (ANCs)
Alaska Native Claims Settlement Act of 1971 established 13 regional corporations and a variety of village corporations. Each Alaskan Native was made a shareholder in one regional and one village corporation.
Deemed economically disadvantaged
Sole-source awards can be made over contract thresholds for all Federal agencies. Subject to Section 811.
HUBZone eligible
Tribes
Tribal governments are legal entities that serve as the parent company
Must prove economic disadvantage the first time one of its firm applies to the 8(a) program; thereafter, need only prove at the request of SBA
Native Hawaiian Organizations (NHOs)
Native Hawaiian have no centrally recognized governing entity to serve as parent company. Rather, Native Hawaiians establish non-profit organizations to benefit the community.
Old rule economic disadvantage based on individuals on NHO board and had to establish for each firm. New rule similar to tribes.
Sole-source awards can be made over contract thresholds for only DoD. Subject to Section 811.
Recently became HUBZone eligible
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12. NHO 8(A) PROGRAM BENEFITS
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13. Nho 8(a) program benefits
Sole-Source Opportunities
No contract thresholds for Department of Defense sole-source contracts
Section 811 of the National Defense Authorization Act for Fiscal Year 2010 (NDAA 2010) (Section 811), Public Law , imposed justification and approval requirements on any 8(a) sole source contract that exceeds $20 million (amount has been recently increased to $22 million)
All other Federal agencies - Contracts up to $4 million for goods and services and $7 million for manufacturing
Set Aside Opportunities
Joint Ventures & Teaming
Provides 8(a) firms with the opportunity to compete for large contracts
Mentor-Protégé Program
Mentor provides mentorship, and technical, management, and financial assistance
No one-time eligibility
A NHO can have multiple companies in the 8(a) program
Community Give Back
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14. Special rules & issues applicable to nho’s
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15. Multiple subsidiaries
NHOs may have more than one subsidiary that may or may not participate in the SBA 8(a) program
Each 8(a) participant must have a unique primary NAICS code
8(a) program encourages business diversification and prohibits perpetual contracts through different entities (i.e. follow-on contracts)
Once an 8(a) participant graduates, there is a 2-year waiting period before another 8(a) applicant may use same primary NAICS code
NHO
For-Profit
8(a) – primary NAICS
8(a) – primary NAICS
Multiple subsidiaries
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16. Multiple subsidiaries –primary naics restrictions
A NHO may NOT own 51% or more of another firm which at the time of application or within the previous 2 years has been operating in the 8(a) program under the same primary NAICS code as the applicant
A NHO may own a participant or other applicant that conducts secondary business in the 8(a) program under the NAICS code which is the primary NAICS code of the applicant entity
New rule allows SBA to change primary NAICS:
“Where SBA believes that the primary industry classification contained in a Participant’s business plan does not match the Participant’s actual revenues over the Participant’s most recently completed 3 fiscal years, SBA may notify the Participant of its intent to change the Participant’s primary industry classification and afford the Participant the opportunity to respond.”
“Where an SBA change in the primary NAICS code of an entity-owned firm results in the entity having 2 Participants with the same primary NAICS code, the second, newer Participant will not be able to receive any 8(a) contracts in the six-digit NAICS code that is the primary NAICS code of the first, older Participant for a period of time equal to 2 years after the first Participant leaves the 8(a) BD program.
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17. An NHO “may not receive an 8(a) sole source contract that is a follow-on contract to an 8(a) contract that was performed immediately previously by another Participant (or former Participant) owned by the same Native Hawaiian Organization.” 13 CFR (e)
Follow on contracts
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18. 13 CFR 121. 103(a) General Principles of Affiliation
13 CFR (a) General Principles of Affiliation. (1) 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.
affiliation
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19. Economically Dependent on B
affiliation
If two businesses are affiliated, SBA will consider the combination of both firms’ receipts or employees to determine the size status of the business
Example:
Business A
Small Business
Prime Contractor
Economically Dependent on B
Power and Control of A
Subcontractor
Large Business
Business B
Business a & business b are:
affiliates for size purposes
INELIGIBLE for small business programs
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20. AFFILIATION 13 CFR 121.103(a) Power and Control
(1) 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.
Ownership, management, and relationships
(2) SBA considers factors such as ownership, management, previous relationships with or ties to another concern, and contractual relationships, in determining whether affiliation exists.
Affirmative or negative control
(3) Control may be affirmative or negative. Negative control includes, but is not limited to, instances where a minority shareholder has the ability, under the concern's charter, by-laws, or shareholder's agreement, to prevent a quorum or otherwise block action by the board of directors or shareholders.
Third party control
(4) Affiliation may be found where an individual, concern, or entity exercises control indirectly through a third party.
Totality of circumstances
(5) In determining whether affiliation exists, SBA will consider the totality of the circumstances, and may find affiliation even though no single factor is sufficient to constitute affiliation.
All affiliates ‘ revenues and employees = size
(6) In determining the concern's size, SBA counts the receipts, employees, or other measure of size of the concern whose size is at issue and all of its domestic and foreign affiliates, regardless of whether the affiliates are organized for profit.
applies to SBIR and STTR
(7) For SBA's Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs, the bases for affiliation are set forth in §
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21. AFFILIATION – IDENTITY OF INTEREST
Affiliation may be found when individuals or firms have identical or substantially identical business or economic interests [13 C.F.R. § (f) ]
Identity of Interest
Family members*
Individuals or firms with common investments
Firms that are economically dependent through contractual or other relationships
*Familial identity of interest affiliation is based on control of firms NOT solely on familial relationship
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22. AFFILIATION – IDENTITY OF INTEREST
Economic Dependence:
One firm provides critical financial assistance to another firm via loans or financial guarantees
One firm generates a majority of its revenue from contracts from another firm
firm B
If 70% or more of Firm A’s revenues comes from Firm B, SBA could find Firm A is economically dependent on Firm B
If Firm A is dependent on Firm B for contracts or business, the success/economic viability of Firm A is dependent on Firm B
Firm A
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23. AFFILIATION –NEWLY ORGANIZED CONCERN
Affiliation may arise where former officers, directors, principal stockholders, managing members, or key employees of one concern organize a new concern…[13 C.F.R. § (g)]
Key Points:
Principals of an existing concern organize a new concern
New concern is in the same or related industry or field of operation
Former principals serve as the new concern's officers, directors, principal stockholders, managing members, or key employees*
Existing 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
*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
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24. AFFILIATION – OSTENSIBLE SUBCONTRACTOR
A contractor and its ostensible subcontractor are treated as joint venturers, and therefore affiliates, for size determination purposes. [13 C.F.R. § (h)(4) ]
Key Points:
Subcontractor performs primary and vital requirements of a contract/task order
Prime contractor is unusually reliant on the subcontractor
SBA considers all aspects of the relationship between the prime and subcontractor:
Terms of the proposal (such as contract management, technical responsibilities, and the percentage of subcontracted work)
Agreements between the prime and subcontractor (such as bonding assistance or the teaming agreement)
Whether the subcontractor is the incumbent contractor and is ineligible to submit a proposal because it exceeds the applicable size standard
Popular size protest ground
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25. AFFILIATION – OSTENSIBLE SUBCONTRACTOR
Factors considered:
Degree of collaboration on the proposal
Affiliation may be found if one firm has too much control/influence over the proposal
Subcontractor is incumbent subcontractor and not eligible to submit own offer
Which firm is performing the most complex and costly contract functions
Which firm is providing key management
SBA looks at prime contractors key personnel and if it relied on the subcontractor for individuals, especially management
Affiliation may be found if wholesale personnel transfers occur from subcontractor to prime
Which firm has the past performance
Personnel and material are NOT discrete
AFFILIATION – OSTENSIBLE SUBCONTRACTOR
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26. AFFILIATION – TOTALITY OF THE CIRCUMSTANCES
In determining whether affiliation exists, SBA will consider the totality of the circumstances, and may find affiliation even though no single factor is sufficient to constitute affiliation. [13 C.F.R. § (a)(5)]
Key Points:
SBA can find affiliation based on totality of circumstances even if no single factor is sufficient
SBA’s preference is to find affiliation based on independent grounds, but will use the totality of circumstances if no other ground is sufficient
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27. AFFILIATION – REBUTTING THE PRESUMPTION
To rebut SBA’s presumption of affiliation, a business may:
Present evidence that shows interests deemed to be identical are in fact separate
Demonstrate clear line of fracture between the two concerns
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28. AFFILIATION – EXCEPTIONS FOR 8(A) PURPOSES
SBA will determine the concern's size independently, without regard to its affiliation with the Native Hawaiian Organization or any other business enterprise owned by the Native Hawaiian Organization, unless the Administrator determines that one or more such concerns owned by the Native Hawaiian Organization have obtained, or are likely to obtain, a substantial unfair competitive advantage within an industry category. [13 CFR (b)]
Key Points:
Industry category refers to a particular NAICS code
Unfair competitive advantage refers to a national market
SBA applies this broad exclusion from affiliation for purposes of 8(a) BD program entry and 8(a) BD contract award
For purposes outside the 8(a) BD program the exemptions are narrower
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29. AFFILIATION – EXCEPTIONS OUTSIDE 8(a)
Business concerns owned and controlled by Indian Tribes, ANCs, NHOs, or CDCs, or wholly-owned entities of Indian Tribes, ANCs, NHOs, or CDCs are not considered to be affiliated with other concerns owned by these entities because of their common ownership or common management. In addition, affiliation will not be found based upon the performance of common administrative services, such as bookkeeping and payroll, so long as adequate payment is provided for those services. Affiliation may be found for other reasons. [13 CFR (b)(2)(ii)]
Key Points:
Exception applies when:
(1) Any of the companies are not 8(a) certified; or
(2) Any company at issue is not owned by the NHO
Common ownership and management amongst companies is not a basis for affiliation
Common administrative services amongst companies owned by an NHO companies is not a basis for affiliation.
Affiliation may be found for other reasons set forth in regulations and which have been interpreted by cases
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30. Common challenges
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31. Common challenges Establishing economic disadvantage
Finding qualified Board members/directors
Properly structuring the entities
Financing
8(a) application process
Succession planning
Complying with regulations (i.e. change in ownership/management, annual reviews)
Lack of understanding/awareness of the NHO 8(a) program
Common challenges
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32. Questions?
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33. THANK YOU FOR ATTENDING
Mahalo!
THANK YOU FOR ATTENDING
TODAY’S PRESENTATION!
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