1. SBA’s Proposed Changes to Mentor- Protégé and Joint Venture Regulations National 8(a) Association 2015 Summer Conference June 16, 2015 Jon M. DeVore Birch Horton Bittner & Cherot Washington, D.C. jdevore@dc.bhb.com © Birch Horton Bittner & Cherot 2015 | BirchHorton.com

2. Presentation Overview Current 8(a) Mentor-Protégé Program Overview  What is it? What are the benefits? Changes to the 8(a) Mentor-Protégé Program  Changes in definitions, clarifications, transfers and terminations New Mentor-Protégé Program for All Small Businesses  Significant differences from current and newly modified 8(a) mentor-protégé program  Chart illustrating program differences Changes to HUBZone Mentor-Protégé Program 2 © Birch Horton Bittner & Cherot 2015 | BirchHorton.com

3. Current 8(a) Mentor- Protégé Program Overview A primer on the status quo of SBA’s 8(a) Mentor-Protégé Program 3 © Birch Horton Bittner & Cherot 2015 | BirchHorton.com

4. What is the 8(a) Mentor-Protégé Program? The 8(a) Mentor-Protégé Program is a developmental tool designed to enhance the ability of 8(a) participants to compete for federal contracts. Mentors provide technical assistance, management assistance, and contract support, and they perform contracts through joint venture agreements with the 8(a) protégé as the prime. Current 8(a) Mentor-Protégé Program 4 © Birch Horton Bittner & Cherot 2015 | BirchHorton.com

5. 8(a) Mentor-Protégé Program Benefits A Mentor and its 8(a) Protégé may pursue contracts as a joint venture. SBA will not find affiliation or undue control based on the Mentor-Protégé arrangement; however, M-P Agreement is not carte blanche protection from affiliation either.  13 CFR 121.103(b)(6). See, e.g., Patriot Construction, Inc., SBA No. SIZ-5439 (2013). 8(a) Protégé may receive financial assistance via the Mentor owning up to 40% of 8(a) concern. Current 8(a) Mentor-Protégé Program 5 © Birch Horton Bittner & Cherot 2015 | BirchHorton.com

6. Details are Important! Mentor firms must:  have favorable financial health;  have good character;  not be suspended or debarred; and  be able to impart value to the protégé through practical experience with the 8(a) Program or general knowledge of business operations and government contracting. An 8(a) protégé firm must:  be in development stage; or  have never received an 8(a) contract; or  have ½ size of its primary NAICS code Protégé may generally have only 1 mentor at a time, but exceptions can be made where the second relationship will not conflict with the first and it pertains to a secondary NAICS code or the protégé seeks to acquire specific expertise that the first mentor does not have. Mentor can have more than one Protégé (if second does not compete with first), but under no circumstances will a mentor be permitted to have more than three protégés at one time. Current 8(a) Mentor-Protégé Program 6 © Birch Horton Bittner & Cherot 2015 | BirchHorton.com

7. SBA Proposes Major Overall of Small Business Regulations Impacting Mentor-Protégé Relationships Will Establish Government-Wide Mentor-Protégé Program for All Small Business Concerns; Make Changes to 8(a) Mentor-Protégé Program 7 © Birch Horton Bittner & Cherot 2015 | BirchHorton.com

8. SBA Proposes Significant New Regulations Proposed Rule to implement 8(a) Program changes & Mentor-Protégé Program expansion published February 5, 2015; comments due May 6, 2015 (after 30-day extension). SBA’s second major proposed rulemaking in the last few months. Impactful changes/clarifications include:  Creation of a Mentor-Protégé Program for All Small Businesses and Related Changes to 8(a) Mentor- Protégé Program  Changes to Joint Venture Regulations for 8(a)s and for All Small Businesses  Changes to Size Standards and HUBZone Regulations 8 © Birch Horton Bittner & Cherot 2015 | BirchHorton.com

9. The Future of SBA’s Mentor-Protégé Programs Changes to the 8(a) Mentor-Protégé Program & New Small Business Mentor-Protégé Program 9 © Birch Horton Bittner & Cherot 2015 | BirchHorton.com

10. Changes to the 8(a) Mentor- Protégé Program Although SBA is creating a new Mentor-Protégé Program for all small businesses (more below), the 8(a) Program’s Mentor-Protégé Program will continue to operate as a separate program. Proposed rule makes various changes to the existing 8(a) Mentor-Protégé Program to make all of the mentor-protégé programs more equitable and easier to consistently regulate, including:  Expanded Definition for Firms that Can Be Protégés  Clarification for Continuing Mentor-Protégé Relationship when Control of Mentor Changes  Ability to Transfer an 8(a) Mentor-Protégé Relationship & JV to General Mentor-Protégé Program Following 8(a) Graduation  SBA May Terminate a Mentor-Protégé Agreement Changes to 8(a) Mentor- Protégé 10 © Birch Horton Bittner & Cherot 2015 | BirchHorton.com

11. Expanded Definition for 8(a) Protégé Firms Current requirements for an 8(a) Protégé: 1.Developmental stage of program participation; 2.Never received an 8(a) contract; or 3.Size that is less than half the size standard corresponding to its primary NAICS code. Proposed Rule eliminates these qualifications in favor of a new size standard. In order for a firm to qualify as an 8(a) protégé, the firm must only:  “Qualify as small for the size standard corresponding to its primary NAICS code; and  Demonstrate 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.” 8(a) Advantage : a protégé firm that graduates from the 8(a) Program but otherwise continues to be small “ may transfer its 8(a) mentor-protégé relationship to a small business mentor-protégé relationship ” under the new mentor-protégé program. JVs in an approved 8(a) mentor-protégé relationship will still be considered small if the protégé qualifies as small, but SBA approval of a JV is not a formal size determination.  This an advantage over other 8(a) joint ventures, which have more rigorous size requirements. 13 CFR 124.513(b). Changes to 8(a) Mentor- Protégé 11 © Birch Horton Bittner & Cherot 2015 | BirchHorton.com

12. Clarification for Continuing 8(a) Mentor- Protégé Relationship when Control of Mentor Changes Codifies current SBA policy. If control of the mentor changes during the term of the agreement, “ the previously approved mentor-protégé relationship may continue provided that, after the change in control, the mentor expresses in writing to SBA that it acknowledges the mentor-protégé agreement and certifies that it will continue to abide by its terms.” This provision will also apply to the new mentor-protégé program for all small businesses. Changes to 8(a) Mentor- Protégé 12 © Birch Horton Bittner & Cherot 2015 | BirchHorton.com

13. Ability to Transfer 8(a) Mentor-Protégé Relationship & Joint Venture to General Mentor-Protégé Program Post- Graduation An 8(a) protégé graduating or otherwise leaving the 8(a) program—but continuing to qualify as small—may transfer its 8(a) mentor-protégé relationship to a general small business mentor- protégé relationship. 8(a) Mentor-Protégé JVs : the JV “ may certify its status as small for any Government contract or subcontract so 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 at issue (or any lessor size standard).” However, if the protégé no longer qualifies as small, the receipts and/or employees of the protégé and mentor would generally be aggregated in determining the JV size after that date. The date of size recertification also depends on the duration of the contract:  For contracts less than five years (including options), contracts awarded to a mentor-protégé JV as a small business count as a small business award for the life of the contract.  For contracts longer than five years where size re-certification is required no more than 120 days prior to the end of the fifth year of the contract and no more than 120 days prior to exercising any option, once the protégé is not small under its primary NAICS code, the JV must aggregate the receipts and employees of its partners in determining whether it continues to qualify as and can re-certify itself as small. Changes to 8(a) Mentor- Protégé 13 © Birch Horton Bittner & Cherot 2015 | BirchHorton.com

14. SBA May Terminate an 8(a) Mentor-Protégé Agreement Proposed rule adds a provision governing when SBA may terminate an 8(a) Mentor-Protégé Agreement. Permits SBA to end an agreement at any time if 1.“it determines that the protégé is not benefiting from the relationship” or 2.“the parties are not complying with any term or condition of the mentor protégé agreement.” Even if SBA terminates the mentor-protégé relationship, a mentor-protégé joint venture is still obligated to perform previously awarded contracts unless there is a stop-work order. Changes to 8(a) Mentor- Protégé 14 © Birch Horton Bittner & Cherot 2015 | BirchHorton.com

15. Certification of Compliance & Basis for Suspension or Debarment New process for the 8(a) participant and its JV partners to certify compliance with: 1.JV agreement requirements; 2.the specific JV Agreement; 3.relevant performance of work requirements; 4.that the joint venture (and any addenda) has prior SBA approval; and 5.there are no unapproved agreement modifications. Especially important in combination with SBA’s proposed paragraph 124.513(l), which allows imposition of suspension or debarment for:  failure to enter a JV Agreement that complies with 124.513(c);  failure to perform a contract in accordance with the JV Agreement;  failure to perform a contract in accordance with performance or work requirements;  failure to submit the Certification of Compliance, or  failure to comply with Inspection of Records provisions (newly re-numbered 124.513(i)). Seems to allow SBA to impose (or threaten to impose) suspension and/or debarment for an 8(a) participant’s failure to follow the prescribed rules and approved JV Agreement terms; also seems to threaten suspension and debarment of non-8(a) JV partners for their failures as well. Certification of Compliance is also imposed for small business joint venture mentor-protégé arrangements under proposed new regulation 125.8(d), likely putting those concerns and partners under the same threat of enforcement as 8(a) concerns and partners here. Changes to 8(a) Mentor- Protégé 15 © Birch Horton Bittner & Cherot 2015 | BirchHorton.com

16. SBA Creates One New Mentor- Protégé Program for All Small Businesses SBA statutorily required to create a mentor-protégé program that is available to all small businesses. Significant change that will greatly expand mentor-protégés’ participation in small business contracting. Rather than creating four new programs, SBA proposes to implement one mentor-protégé program for the following SBCs:  Service-Disabled Veteran-Owned Small Business Concerns (SDVO SBCs)  HUBZone SBCs  Women-Owned Small Business (WOSB) concerns  all other small businesses  This is in addition to the current mentor-protégé program for 8(a) participants Five separate mentor-protégé programs?  SBA believes that is it easier for small businesses and the acquisition community to utilize and understand one program, but requested comments on whether it should finalize five separate mentor- protégé programs. New Mentor-Protégé Program for All Small Businesses 16 © Birch Horton Bittner & Cherot 2015 | BirchHorton.com

17. Mentors No more than three protégé firms in the aggregate, not three in each program Up to 3 protégés : Like the 8(a) mentor-protégé program, mentors under the new program will generally be limited to one protégé at a time, but SBA will be able to authorize up to three protégés per mentor. Limitation applies to both the general small business mentor-protégé program and to the 8(a) mentor-protégé program.  One mentor may not have more than three protégés in the aggregate at one time under both of the mentor-protégé programs. Like the current 8(a) mentor-protégé program, a protégé in the new program may not become a mentor and retain its protégé status. Non-Profits cannot be mentors  Change from current 8(a) regulations to streamline with new prohibition against non-profits as mentors in new program. New Mentor-Protégé Program for All Small Businesses 17 © Birch Horton Bittner & Cherot 2015 | BirchHorton.com

18. Protégés Any firm that qualifies as a small business for the size standard corresponding to its primary NAICS code may qualify as a protégé in either the small business or 8(a) mentor-protégé program.  SBA will verify that a firm qualifies as a small business under its primary NAICS code before approving that firm to act as a protégé  may take place as part of a firm’s request for participation in the small business mentor-protégé program, or  as part of a size protest determination relating to the size standard corresponding to the NAICS code for its primary NAICS code prior to that time.  If SBA previously found a firm to be small as part of a formal size determination or size appeal, the firm must to certify that there has been no change in its small business status since that determination. Like current 8(a) protégé firms, protégés the new mentor-protégé program may generally have only one mentor at a time, but SBA may approve a second mentor “where the second relationship will not compete or otherwise conflict with the assistance set forth in the first mentor-protégé relationship and 1.the second relationship pertains to an unrelated NAICS code; or 2.the protégé firm is seeking to acquire a specific expertise that the first mentor does not possess.” SBA “may examine” the SDVO status or WOSB status of an applicant protégé that claims such status in a federal procurement database. New Mentor-Protégé Program for All Small Businesses 18 © Birch Horton Bittner & Cherot 2015 | BirchHorton.com

19. Benefits of Mentor-Protégé Relationships Mentor-Protégé Joint Ventures:  Like in the 8(a) mentor-protégé program, a protégé may enter into a JV with its SBA-approved mentor and have the JV qualify as a small business for any federal government contract or subcontract for which the protégé firm is qualified to perform, provided the protégé qualifies as small for the size standard corresponding to the NAICS code assigned to the procurement.  However, this does not mean that such joint venture affirmatively qualifies for any other small business program. Mentor may own an equity interest of up to 40% in the protégé firm  SBA requested comments on whether this ownership interest should be temporary or whether it should be able to survive termination of the mentor-protégé relationship. New Mentor-Protégé Program for All Small Businesses 19 © Birch Horton Bittner & Cherot 2015 | BirchHorton.com

20. Applications for the Mentor- Protégé Program for all Small Businesses Application Options for 8(a) Firms:  Because the proposed rule continues a separate mentor-protégé program for 8(a) participants, an 8(a) firm could seek a mentor-protégé relationship through the 8(a) program or through the small business mentor-protégé program.  SBA seeks comments on whether one office should review and either approve or decline all mentor-protégé agreements. SBA is considering instituting “open” and “closed” periods for program applications. Process for the protégé applicant to make a Request for Reconsideration if SBA declines a mentor-protégé application.  Very similar to the Request for Reconsideration process already established for the 8(a) mentor- protégé program, except that the decision maker would be the Director of Government Contracting (D/GC)(or his/her designee). New Mentor-Protégé Program for All Small Businesses 20 © Birch Horton Bittner & Cherot 2015 | BirchHorton.com

21. Requirements for Written Mentor-Protégé Application Must be in writing and identify specifically the benefits intended to be derived by the proposed protégé. Firms cannot receive program benefits prior to SBA approval. Applicant protégés for either program must identify other mentor-protégé relationships it has through another federal agency or SBA and identify how the mentor’s proposed assistance is different. Three-Year Relationship:  Unlike the 8(a) Mentor-Protégé Program, SBA proposes to limit the duration of a general mentor-protégé relationship to three years, with SBA reviewing relationships annually to approve continuation for another year.  A protégé may have one three-year mentor-protégé agreement with one entity and one three-year mentor- protégé agreement with another entity, or two three-year mentor-protégé agreements (successive or otherwise) with the same entity.  SBA invited comments regarding whether the three-year limit is appropriate and whether SBA should allow a mentor and protégé to enter into an additional mentor-protégé agreement upon the expiration of the original agreement. New Mentor-Protégé Program for All Small Businesses 21 © Birch Horton Bittner & Cherot 2015 | BirchHorton.com

22. Certification of Compliance & Basis for Suspension or Debarment SBA proposes to require a written certification of compliance from a small business JV partner prior to performance of any contract set aside/reserved for small businesses; Forces small businesses and their mentors to certify compliance with some of the relevant rules.  This is especially important when combined with SBA’s proposed paragraph 125.8(i), which allows imposition of suspension or debarment for certain violations regarding a mentor-protégé JV authorized under 125.9. The following grounds will be considered “willful violation[s] of a regulatory provision or requirement applicable to a public agreement or transaction:”  failure to enter a JV Agreement that complies with 125.8(b),  failure to perform a contract in accordance with the JV Agreement,  failure to perform a contract in accordance with performance of work requirements,  failure to submit the Certification of Compliance,  failure to comply with Inspection of Records provisions in proposed 125.8(g). Seems to allow SBA to impose (or threaten to impose) suspension and/or debarment for a protégé’s failure to follow the prescribed rules and approved JV Agreement terms; it also seems to threaten suspension and debarment of non-small business JV partners for their non-compliance as well. Be advised that there are some subtle distinctions between the Certification of Compliance requirements for 8(a) protégés and other small business protégés. Termination : proposed rule also notes that “SBA may terminate the mentor-protégé agreement at any time if it determines that the protégé is not benefiting from the relationship or that the parties are not complying with any term or condition of the mentor protégé agreement.” New Mentor-Protégé Program for All Small Businesses 22 © Birch Horton Bittner & Cherot 2015 | BirchHorton.com

23. SBA Must Approve Mentor- Protégé Programs of Other Agencies Federal departments and agencies can no longer carry out agency-specific mentor-protégé programs without SBA program approval.  Agencies allowed to continue their current mentor-protégé programs for one year after effective date of final rule before going through SBA approval.  Agencies continuing their own programs will be subject to statutory annual reporting requirements.  Exception: Department of Defense. A potential protégé must identify other mentor-protégé relationships it has had through other agencies and provide SBA copies of such agreements. Assistance to be provided by the proposed mentor under the new program must be different than assistance provided under other programs. New Mentor-Protégé Program for All Small Businesses 23 © Birch Horton Bittner & Cherot 2015 | BirchHorton.com

24. Joint Ventures Between Small Business Protégés and Their SBA-Approved Mentors SBA is adding a new provision to specify requirements for JVs between small business protégé firms and their mentors. As with the proposed changes to the 8(a) Program, SBA proposes to allow a general small business protégé to joint venture with its SBA-approved mentor and qualify as a small as long as the protégé qualifies as small under the corresponding NAICS code assigned to the procurement. Agencies must consider the past performance of each joint venture party when evaluating a proposal from the joint venture under the proposed rules. New Mentor-Protégé Program for All Small Businesses 24 © Birch Horton Bittner & Cherot 2015 | BirchHorton.com

25. Inspection of Records – SBA Access to ALL Records of Joint Venture Partners SBA proposes the following language, resulting in the following requirement for all joint venture partners (not just the small business upon whom eligibility is based):  Inspection of records. The joint venture partners must allow SBA’s authorized representatives, including representatives authorized by the SBA Inspector General, during normal business hours, access to its files to inspect and copy all records and documents. SBA’s authority to inspect is NOT LIMITED to only the records relating to the joint venture!  Joint venture partners must allow SBA authorized representatives (including SBA IG) to access files and inspect and copy all records and documents.  Similar provisions are added to program specific regulations. Added Teeth : Risks of non-compliance include suspension or debarment for mentor-protégé joint venture partners.  Failure to comply with the Inspection of Records rule in proposed (new) 125.8(g) could result in suspension or debarment.  The preamble states that the suspension and debarment provision applies to mentor-protégé joint ventures, but the Inspection of Records provision applies to all small business joint ventures.  It is unclear whether non-mentor-protégé joint ventures under the small business joint venture program would be at risk of suspension or debarment for failure to comply. New Mentor-Protégé Program for All Small Businesses 25 © Birch Horton Bittner & Cherot 2015 | BirchHorton.com

26. No Change to 8(a) Joint Venture Size Standards While joint ventures involving participants in other SBA programs such as HUBZone and WOSB will qualify as small as long as JV partners are small in the aggregate, SBA is NOT proposing to remove similar restrictions affecting 8(a) JV size requirements, including :  the requirement that a JV’s 8(a) participant must be less than one half the size standard, and  the procurement needs to exceed half the size standard (revenue-based standard) or $10 million (employee based standard). These more rigorous requirements are unchanged for 8(a) JVs and SDVOSB JVs, but will not apply to HUBZone and WOSB JV arrangements. New Mentor-Protégé Program for All Small Businesses 26 © Birch Horton Bittner & Cherot 2015 | BirchHorton.com

27. HUBZone Contracts May be Performed by JVs with Non- HUBZone SBCs SBA proposes to lift significant restrictions against HUBZone JVs and allow:  JV contracts between a HUBZone protégé and its mentor, and  JVs between HUBZone SBCs and one or more non-HUBZone SBCs.  Current regulations only permit HUBZone SBCs to enter into JVs with other HUBZone SBCs.  Change makes HUBZone regulations more consistent with other small business programs. SBA would also lift the restriction that HUBZones may not joint venture with their mentor unless the mentor is a qualified HUBZone SBC.  But HUBZone SBC will not be able to joint venture with any mentor that has not been approved by SBA unless the mentor is also a qualified HUBZone SBC. Like the other programs, the HUBZone SBC must be the project manager, control performance of the HUBZone JV contract, and perform at least 40% of the JV work. SBA requested comments on:  whether allowing JVs between HUBZone firms and non-HUBZone firms (other than the HUBZone firm’s mentor) makes sense in light of the purposes of the HUBZone program, and  whether the purposes of the HUBZone program would be appropriately served by allowing non-HUBZone firms to act as mentors and joint venture with protégé HUBZone firms. Changes to HUBZone Mentor- Protégé 27 © Birch Horton Bittner & Cherot 2015 | BirchHorton.com

28. 8(a) Mentor-Protégé Program v. New Small Business Mentor-Protégé Program at a Glance Changes to HUBZone Mentor- Protégé 28 © Birch Horton Bittner & Cherot 2015 | BirchHorton.com Proposed Revised 8(a) Mentor-Protégé Program Proposed Small Business Mentor-Protégé Program Size of Protégé & Size Determination of Protégé New size standard. Firm must only:  “Qualify as small for the size standard corresponding to its primary NAICS code; and  Demonstrate 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.” Same as 8(a) Mentor-Protégé Program (left), but  A self-certified small business protégé has to seek a formal size determination from SBA to verify its size status (usually can self-certify, unlike 8(a) participants with application and annual review requirements).  Formal size determination is made in connection with firm’s primary NAICS code, so prospective protégé would have to (1) ascertain its primary NAICS code, and (2) be prepared to support that determination based on its contracting experience and revenues over last 3 years. Transferring a Mentor-Protégé Relationship 8(a) Advantage: an 8(a) protégé graduating/leaving the 8(a) Program but continuing to qualify as small “may transfer its 8(a) mentor-protégé relationship to a small business mentor-protégé relationship.” No such benefit in new mentor-protégé program for all small businesses. Transferring a Mentor-Protégé Joint Venture 8(a) Advantage: 8(a) Mentor-Protégé JVs may transfer the JV to the SB Mentor-Protégé Program: the JV “may certify its status as small for any Government contract or subcontract so 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 at issue (or any lessor size standard).” No such benefit in new mentor-protégé program for all small businesses.

29. 8(a) Mentor-Protégé Program v. New Small Business Mentor-Protégé Program at a Glance Changes to HUBZone Mentor- Protégé 29 © Birch Horton Bittner & Cherot 2015 | BirchHorton.com Proposed Revised 8(a) Mentor-Protégé Program Proposed Small Business Mentor-Protégé Program If SBA Declines the Application Decision maker on request to reconsider is the AA/BD.Decision maker on request to reconsider is the D/GC. Length of Mentor-Protégé Relationship 8(a) Advantage: No limitation on duration of 8(a) mentor- protégé relationship Duration of general mentor-protégé relationship limited to three years. SBA will review annually to approve continuation for another year. Protégé may have one three-year mentor-protégé agreement with one entity and one three-year mentor-protégé agreement with another entity, or two three-year mentor-protégé agreements (successive or otherwise) with the same entity. SBA Approval of Addendums to JVAs SBA must approve JVAs prior to 8(a) contract award, but (proposed) SBA is not required to approve any addendum addressing performance of a second or third contract to JV for non-8(a) contracts. Unique 8(a) JV requirement:  8(a) JVs would be required to submit an addendum to their JVAs for each award under blanket purchase agreements, basic ordering agreements, and similar vehicles;  Each award under these vehicles considered a separate award (counted against limitations). SB Advantage: No similar requirement for addendum approvals for awards to JVs under blanket purchases agreements, basic ordering agreements, etc.

30. SBA Increasing Scrutiny of Mentor-Protégé Agreements SBA has been increasing scrutiny of 8(a) applications and enforcement actions against small businesses across the board.  This increase in oversight has been particularly prevalent as it pertains to 8(a) mentor-protégé agreements, and it will likely apply to the new small business mentor-protégé program as well. Caution: Expansion of mentor-protégé opportunities could dramatically increase the workload of an already overburdened SBA staff.  8(a) firms report months-long waiting periods for SBA approval of mentor-protégé and joint venture agreements.  Although SBA has stated its commitment to streamlining its internal procedures for reviewing agreements, be prepared for longer processing times with the rollout of the new mentor-protégé program. 30 © Birch Horton Bittner & Cherot 2015 | BirchHorton.com

31. Questions ? Jon M. DeVore Birch Horton Bittner & Cherot Washington, D.C. jdevore@dc.bhb.com 31 © Birch Horton Bittner & Cherot 2015 | BirchHorton.com