1. Small Business Administration Office of Investment SBIR Size Regs Overview of Proposed Rules

2. Small Business Administration 2 Implementing SBIR/STTR Reauthorization Size Rule  Modification of broader size regulations that affect all SBA programs, specifically for SBIR  Focus: size, affiliation, ownership and control  Timing Proposed rule – May 15 Statutory deadline for final rule December 31, 2012 Policy Directive  SBA policy that guides how agencies should administer the program  Focus: set asides, managing fraud/waste/abuse commercialization, admin funding, streamlining the program, etc  Target timing: June 30, 2012

3. Small Business Administration 3 Proposed Rule: Background On May 15, SBA issued a proposed rule that in implementing the statutory requirements of the programs Seeks to simplify and streamline the current ownership and affiliation criteria for the SBIR and STTR programs Provides a clear set of guidelines for small businesses to understand and bright-line tests by which small businesses can easily determine whether they meet the ownership, size and affiliation requirements of the programs Addresses the unique needs of the SBIR program, avoiding a one-size-fits all approach to size regulations Protects the integrity of the program as a small business program

4. Small Business Administration 4 Proposed Rule: Public Input  Abbreviated time frame to issue a proposed rule  Agency was unable to conduct public outreach prior to drafting and issuing this proposed rule  Now: 60 day public comment period Soliciting public comments on the proposed rule Conducting public outreach sessions following publication of the rule, such as webinars and town hall meetings with SBA Office of Advocacy, to gather additional input on these statutory provisions and SBA’s proposed implementation Go to www.regulations.gov (RIN 3245-AG46) to make commentswww.regulations.gov

5. Small Business Administration 5 Focus for Today’s Meeting Key Provisions 1.Ownership and Control 2.Domestic ownership 3.Affiliation 4.Time of Eligibility 5.Other For each  Statutory requirements  Other considerations  Proposed Rule  Questions

6. Small Business Administration 6 Ownership and Control Reauthorization Act provision  § 5107 of the SBIR/STTR Reauthorization Act permits participation by firms that are majority owned by multiple venture capital operating companies (VCOCs), hedge funds, or private equity firms, with limitations

7. Small Business Administration 7 Ownership and Control Considerations  SBA’s current regulations, 13 C.F.R. § 121.702 State that an SBIR awardee must be a business concern that is at least 51% owned and controlled by U.S. citizens or permanent resident aliens or at least 51% owned and controlled by another business that is at least 51% owned and controlled by U.S. citizens or permanent resident aliens.  § 5107 of the SBIR/STTR Reauthorization Act (permitting firms owned by VCOCs, hedge funds and private equity firms to participate in program)

8. Small Business Administration 8 Ownership and Control Proposed Rule (13 C.F.R. § 121.702) An SBIR or STTR applicant must:  Be a concern which is more than 50% Directly owned and controlled by one or more individuals who are citizens of the United States or permanent resident aliens in the United States, or by domestic business concerns; or Owned by multiple domestic business concerns that are venture capital operating companies, hedge funds, private equity firms, or any combination of these domestic business concerns; and  No single venture capital operating company, hedge fund, or private equity firm may own more than 50% of the SBIR or STTR applicant.

9. Small Business Administration 9 Ownership and Control Basis for Proposed Rule  In implementing the statute, we attempt to provide clarity to small businesses on the types of ownership structure that are eligible for the programs.  The requirement that the SBIR and STTR participant must be more than 50% owned by U.S. citizens, permanent resident aliens or domestic business concerns ensures that the applicants are domestic-owned small businesses.  It addresses statutory requirement permitting participation by small businesses that are majority owned by multiple VCOCs, hedge funds and private equity firms, subject to the statutory limitations for each agency.  It provides a straight-forward and simplified method for determining eligibility, within the parameters of the statutory changes.  Specifics on “Quota” addressed in Policy Directive

10. Small Business Administration 10 Examples Domestic Individuals (80%) Individual and Large Firm Ownership Large Firm (20%) Small Business Small Business b (51%) Owned by Another Small Business Small Business a Minority Stake Multiple VC Ownership VC a (20%) VC b (20%) VC c (20%) Small Business Majority VC Owned – Not Okay VC a (51%) VC b (20%) Small Business

11. Small Business Administration 11 Ownership and Control Request for Comments  Does the eligibility criteria meets the statutory purpose of the programs with respect to domestic ownership of the applicant?  Does the eligibility criteria meet the statutory purpose of the programs with respect to ownership by other-than-small businesses?  Should the rule address other issues besides the above with respect to ownership?

12. Small Business Administration 12 Domestic Business Concern Reauthorization Act provision  § 5107(c)(3)(A) of the SBIR/STTR Reauthorization Act states that SBA shall consider certain criteria when determining whether the: SBIR/STTR applicant is a domestic business concern SBIR/STTR applicant is majority owned by domestic business concerns (or individuals that are U.S. citizens)

13. Small Business Administration 13 Domestic Business Concern Considerations  SBA’s current regulations, 13 C.F.R. § 121.105 defines the term “business concern or concern” to mean one that is For profit, Has a place of business located in the United States, and Which operates primarily within the United States or which makes a significant contribution to the U.S. economy through payment of taxes or use of American products, materials or labor.  Department of Defense Federal Acquisition Regulations Supplement (DFARS), 48 C.F.R. § 225.003 defines the term "domestic concern" to mean a concern Incorporated in the United States (including a subsidiary that is incorporated in the United States, even if the parent corporation is a foreign concern) or An unincorporated concern having its principal place of business in the United States.

14. Small Business Administration 14 Domestic Business Concern Proposed Rule (13 C.F.R. § 121.701)  Domestic business concern means a business entity (including a venture capital operating company, hedge fund, or private equity firm) organized for profit; with a place of business located in the United States; which operates primarily within the United States or which makes a significant contribution to the U.S. economy through payment of taxes or use of American products, materials or labor; and created or organized in the United States, or under the law of the United States or of any State.

15. Small Business Administration 15 Domestic Business Concern Basis for Proposed Rule  SBA adopted its current definition of “domestic business concern” and added that the domestic business concern must also be created or organized in the United States, or under the law of the United States or of any State.  SBA did not propose the DFARS definition because we do not believe it is sufficiently restrictive – the DFARS definition does not appear to require an incorporated concern to have a place of business in the United States.  SBA believes that proposed definition not only meets statutory requirements set forth in the Act but is straightforward and easy to understand, has generally been utilized for SBA’s programs for many years, and has ensured that domestic small business concerns receive the benefits of SBA’s programs.  SBA believes that small businesses can certify vis a vis their eligibility for the program without undue additional burden and complexity.

16. Small Business Administration 16 Domestic Business Concern Request for Comments  Should SBA require that more than 50% of the domestic business concern be either directly or indirectly owned by U.S. citizens, permanent resident aliens, or domestic corporations, partnerships or limited liability companies?  Should definition include additional criteria to ensure that the business is truly a domestic concern?  Should SBA adopt the more simplified definition of domestic concern used in the DFARS?  Are there other definitions, particularly in place at other federal agencies, that SBA should consider?

17. Small Business Administration 17 Affiliation: Overview Small Business LendersInvestors Suppliers Licensees/ Licensors Customers Small Business Affiliation Company X Power to Control Employees 400 125 ------ 525

18. Small Business Administration 18 Affiliation Reauthorization Act provision  § 5107(c)(3)(D) of the SBIR/STTR Reauthorization Act sets forth an outline for affiliation with respect to those applicants that are majority owned by VCOCs, hedge funds, or private equity firms, as well as any other business that the VCOC, hedge fund, or private equity firm has financed

19. Small Business Administration 19 Affiliation Proposed Rule (13 C.F.R. § 121.702(c)) 1.Affiliation based on stock ownership 2.Affiliation arising under stock options, convertible securities, and agreements to merge 3.Affiliation based on common management 4.Affiliation based on identity of interest 5.Affiliation based on the newly organized concern rule 6.Affiliation based on joint ventures 7.Affiliation based on the ostensible subcontractor rule 8.Affiliation based on license agreements 9.Affiliation based on portfolio companies

20. Small Business Administration 20 Affiliation Basis for Proposed Rule  In seeking to implement the statute and its requirements for new affiliation rules around VCOCs, SBA sought to create simple, bright-line tests for SBIR and STTR applicants to apply when determining eligibility with respect to size and affiliation.  Certain affiliation principles are not necessarily applicable to SBIR or STTR applicants as a result of the general business structure and purpose of such business concerns. SBA’s proposed rule explains that where an SBIR or STTR applicant’s voting stock is widely held, or two or more persons hold large blocks of voting stock but no one person owns more than 50% of the stock, then the board of directors controls the applicant. SBA believes that in these two instances (minority holdings are equal in size and voting stock is widely held), the investments are diffused and for purposes of the SBIR and STTR programs, control would rest with the board of directors since it is that body that is truly running the business.

21. Small Business Administration 21 Checklist 1 Illustrative DISCLAIMER: The following is an example of a type of “checklist” that SBA is considering using to assist small businesses in understanding its eligibility rules. This “checklist” should not be used at this time by a small business to determine eligibility for the program. Size:  Applicant, along with all of its affiliates, has less than 500 employees. (See Affiliation Checklist for help in determining whether the applicant has any affiliates.) Eligibility:  Applicant is not more than 50% owned by a single VCOC, hedge fund or private equity firm. Applicant is either:  More than 50% directly owned and controlled by one or more U.S. citizens, permanent resident aliens, or domestic business concerns; or  More than 50% owned by multiple domestic business concerns that are VCOCs, hedge funds, or private equity firms.

22. Small Business Administration 22 Checklist 2 Illustrative DISCLAIMER: The following is an example of a type of “checklist” that SBA is considering using to assist small businesses in understanding its affiliation rules. This “checklist” does not include all of the current types of affiliation and should not be used by a small business to determine affiliation. Affiliation: The Applicant will include the employees of the affiliates when determining whether the Applicant has less than 500 employees. If you can check all of the following, then the applicant may NOT be affiliated with another business.  A business, entity, or individual does not own more than 50% of the applicant’s voting stock, or have the right to own more than 50% via stock options or convertible securities.  The applicant does not have an agreement to merge with another company.  The CEO, President, Managing Partner or Managing Member of the applicant does not control the management of one or more other businesses.  A single board member who controls the board of the applicant does not control the board or management of another business.  The applicant does not have a joint venture with another entity for this application.  The applicant’s owners and managers do not have any family members with identical or substantially identical business interests.  The applicant does not substantially depend on another business e.g. for a disproportionately large percentage of revenue or for non-market-rate financing.  The applicant will not subcontract out a material amount of the project and will not be unusually reliant on a subcontractor for the SBIR/STTR award.  If a license is involved, the applicant has a license agreement for a product or trademark that allows the applicant the right to profit and bear any risk of loss associated with the license.  The applicant’s officers, directors, principal stockholders, managing members or key employees are not former officers, directors, principal stockholders, managing members or key employees of a different company that is in the same or related industry as the applicant, and which furnishes the applicant with contracts, financial or technical assistance, indemnification on bonds, or facilities.

23. Small Business Administration 23 Affiliation Request for Comments  Did SBA create a bright line test for determining affiliation? What specific parts need more clarity? Are there other suggestions on specific ways to draw “bright lines” for material issues?  Should SBA retain the current affiliation rule with respect to minority stock holdings and if so, should we should set forth a specific threshold by which we will find control and therefore affiliation (e.g., if a person owns 33% or more of the company) in order to create a bright-line test for applicants?  Should SBA find affiliation if two or three persons or businesses collectively own more than 50% of the applicant, and the same two or three persons or businesses collectively own more than 50% of any other company or entity?  The proposed rule presumes affiliation based on an identity of interest between business concerns that are economically dependent through contractual or other arrangements. Because it is not clear how often these types of situations arise for SBIR and STTR applicants, should SBA retain this rule for purposes of the SBIR and STTR programs?

24. Small Business Administration 24 Time of Eligibility Reauthorization Act provisions  § 5143 of the Reauthorization Act states that SBA is to require each applicant for and small business concern that receives funding under the program certify it is in compliance with the program requirements.  § 5143 of the Reauthorization Act states that SBA shall consult with the Council of Inspectors General on Integrity and Efficiency when developing procedures and requirements for the certification.

25. Small Business Administration 25 Time of Eligibility Considerations  SBA’s current regulations at 13 C.F.R. § 121.702 and 121.704 For the SBIR Program, state that size and eligibility are determined at the time of award for both Phase I and Phase II awards.  SBA’s current regulations at 13 C.F.R. § 121.404 For government contracting programs, size is determined at the time the business submits its initial offer, including price.

26. Small Business Administration 26 Time of Eligibility Proposed Rule (13 C.F.R. § 121.704)  The size and eligibility status of a concern for the purpose of a funding agreement under the SBIR and STTR programs is determined as of the date the concern submits a written self-certification that it is small and meets the eligibility requirements of the program to the Federal agency as part of its initial proposal (or other formal response) to a Phase I or Phase II SBIR or STTR announcement or solicitation and at the time of award.

27. Small Business Administration 27 Time of Eligibility Basis for Proposed Rule  Requiring the applicant to be eligible at the time of offer is a date certain – the small business knows when it will submit an offer and can determine with some accuracy whether it will be small at that time.  Would ensure that only eligible small businesses are considered for award. Agencies would not review a proposal from a business that is not eligible and may never become eligible.  Did not believe it is costly or difficult for an individual to start a sole proprietorship or company prior to submitting an offer.  Certifications at the time of application and award may be a useful mechanism to reduce fraud, waste and abuse in the program.

28. Small Business Administration 28 Time of Eligibility Request for Comments  What impact would this change have on the program, if any?  Is it a burden to have a small business certify its eligibility at the time it submits an application in response to the SBIR or STTR solicitation or announcement and at the time of award?  Other?

29. Small Business Administration 29 STTR Considerations  Statutory provisions relating to majority ownership of VCOCs, affiliation, relate specifically to the SBIR program  § 5104 permits SBIR Phase I awardee to receive STTR Phase II award, and vice versa  Complexity of having differing rules for the two programs Proposed rule  Apply same size, eligibility rules for STTR as SBIR