March 10, 2015

SBA Proposes Government-Wide Mentor-Protégé Rule

6 min

In early February, the U.S. Small Business Administration (SBA) released a proposed rule that would significantly expand opportunities for small businesses to participate in the mentor-protégé program by creating a government-wide mentor-protégé framework and clarifying the related rules on joint ventures. These proposed changes would implement the Jobs Act of 2010 and the 2013 National Defense Authorization Act (NDAA). Contractors and other industry participants are encouraged to comment on the proposed rule by April 6, 2015.

Establishment of a Government-Wide Mentor-Protégé Program

The mentor-protégé program was created as a business development tool in which mentors provide protégés with various types of assistance, including "technical and/or management assistance; financial assistance in the form of equity investments and/or loans; subcontracts; and/or assistance performing Federal prime contracts through joint venture arrangements." To achieve this objective for more small businesses, the SBA proposes to establish a Government-wide mentor-protégé program that would mirror the SBA's mentor-protégé program for companies in the 8(a) BD program and expand those benefits to other qualified small businesses.

The SBA's proposed rule will broaden the mentor-protégé program and make it available to all types of small business contractors. Critically, the proposed rule would establish a single mentor-protégé framework that would span all small business programs, rather than creating individual SDVOSB, HUBZone, and WOSB mentor-protégé programs. The only exception is the 8(a) program, which would remain separate. The SBA has proposed this approach as a result of its concern "that having five separate business mentor-protégé programs could become confusing to the public and procuring agencies and hard to implement by SBA."

Moreover, a number of federal agencies currently operate their own individual mentor-protégé programs. Because the 2013 NDAA prohibited federal agencies from maintaining their own programs absent explicit SBA approval, the proposed rule will render such individual programs unnecessary in light of the proposed government-wide program. The proposed rule would allow a department or agency that is currently operating an independent mentor-protégé program to continue to do so for only one year after the SBA regulations become final. After that point, SBA approval is required. The Department of Defense is exempt from this requirement.

Qualifications for Mentors and Protégés

The proposed rule sets forth additional and clarified requirements for qualification under the government-wide mentor-protégé program. Pursuant to the SBA's proposed regime, eligibility as a mentor is contingent upon the following.

  • The entity must "demonstrat[e] a commitment and the ability to assist small business concerns."
  • A single entity cannot simultaneously serve as both a mentor and a protégé. The two roles are mutually exclusive.
  • Only for-profit concerns are eligible to serve as mentors (a change from the current rules for the 8(a) mentor-protégé program).
  • A mentor generally may have only a single protégé at any given time. The SBA may allow an entity to mentor up to three protégés at once "if it can demonstrate that the additional mentor-protégé relationship will not adversely affect the development of either protégé firm."

Additionally, the proposed rule requires protégés to satisfy the following conditions.

  • A protégé typically will have only one mentor at a time. A single entity may have two mentors if "the two relationships will not compete or otherwise conflict with each other and the protégé demonstrates that the second relationship pertains to an unrelated, secondary NAICS code, or the first mentor does not possess the specific expertise that is the subject of the mentor-protégé agreement with the second mentor."
  • The protégé must qualify as a small business under its primary NAICS code. Note that this represents a departure from the current 8(a) mentor-protégé rules, which are more stringent in that they require a protégé to have a size that is less than half of the size standard for its primary NAICS code.
  • In contrast to the existing self-certification process under the 8(a) BD program, the proposed rule would require that the SBA actively verify a company's small business status and eligibility as a protégé.

As under the current 8(a) program, a mentor-protégé joint venture will qualify as a small business for any federal contract if the protégé qualifies as small under the size standard assigned to the procurement. The SBA seeks to limit the duration of a mentor-protégé relationship to three years, although two three-year agreements with the same entity is permitted under the proposed rule.

Changes and Clarifications to the Joint Venture Rules

The proposed rules also seek to shed light on the SBA's intended definition of a joint venture for purposes of SBA programs. The current language contained in § 121.103(h) has "caused some confusion as to what an informal joint venture arrangement means." The proposed rule clarifies the definition by explicitly requiring that any joint venture be in writing, including informal joint ventures. According to the proposed rule, "SBA never meant that an informal joint venture arrangement could exist without a formal written document," but "merely intended to recognize that a joint venture need not be established as a limited liability company or another formal separate legal entity." Moreover, SBA approval of any mentor-protégé agreement will be required under the proposed rule before the entities receive any benefits from the program.

Additionally, in an attempt to maximize the benefit realized by small protégé firms, the proposed rule specifies that a joint venture existing as a separate legal entity "may not be populated with individuals intended to perform contracts awarded to the joint venture." Thus, in contrast to the current rule, which permits a populated joint venture, the proposed rule would allow separate legal entity joint ventures to maintain their own employees for administrative purposes, but not for purposes of performing contracts awarded to the joint venture.

The SBA also seeks comments on a potential requirement that all joint ventures under the mentor-protégé program be formed as separate legal entities, which the SBA believes "would significantly enhance SBA's ability to monitor and track awards to mentor-protégé joint ventures."

Compliance Monitoring and Fraud Prevention

The SBA has expressed its unequivocal position that "joint ventures permitted by SBA's regulations must benefit small businesses, and must not be used as vehicles to allow companies to fraudulently or improperly benefit from SBA contracting programs." Thus, the proposed rule also strengthens reporting and compliance provisions to ensure that participating firms abide by the letter of the regulations, as well as the spirit underlying the mentor-protégé program. The proposed rule would require all members of joint ventures to "certify to the contracting officer and SBA prior to performing any such contract that it will perform the contract in compliance with the joint venture regulations and with the joint venture agreement." Participants will also be required to submit an annual report certifying compliance with applicable regulations and the joint venture agreement. Failure to comply may result in suspension or debarment.

Comments on the proposed rule are due by April 6, 2015.

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If you have any questions about how these proposed rules could affect your business, please contact Paul Debolt.