New SBA Rules on Federal R&D Funding Program Face Scrutiny

By Pamela J. Bethel

The assistance of former O’Riordan Bethel intern Lindsey Thomas in writing this blog entry is much appreciated.

The Small Business Administration (SBA) recently announced its proposed new rules regarding the standards for qualification for research and development awards under the Small Business Innovation Research Program (SBIR). These new rules, however, are coming under heated scrutiny as they potentially could allow foreign-owned companies or large businesses to compete for the highly coveted federal research and development funds.

As matters now stand, an applicant applying for SBIR funds must be majority-owned by either an American individual or an American company, or a permanent resident. However, the SBA intends to eliminate the American-owned requirement, instead making all companies with a “domestic business concern” eligible. This is where the loophole was created. Domestic business concerns are required to be organized and have the majority of their operations in the United States; however, many are not majority-owned by Americans or permanent residents.

Furthermore, in the past, rules that define when a minority investor controls the company have helped the SBA determine whether a company is a legitimate small business. The new changes would impose a blanket rule that dictates that the board controls a company if there is no majority stake. This rule would not take into account all of the company’s business affiliates, which, if entirely included in the calculation, would often dictate that a company is too large to be eligible for SBIR funds. Accordingly, there is grave potential for larger companies to masquerade as smaller companies.

As a New York Times columnist wrote last month, these proposed changes “seem to run contrary to the explicit intent of Congress, which said in the law that it expected the SBA to draft regulations that ‘preserve and maintain the integrity of the SBIR program as a program for small-business concerns in the United States by prohibiting large businesses or large entities or foreign-owned businesses or foreign-owned entities from participation in the program.’ ”

As the lens of scrutiny focuses more clearly on these new SBA rules and exposes the lack of safeguards for American-owned small businesses, it is likely that the SBA will make changes before the rules are actually implemented. After all, the proposed rules are just that, proposed. Chances are that the SBA will make additional changes, as there is just too much at stake if the rules as currently proposed go into effect.

Comments were due on July 16, 2012, and the SBA is required to issue final regulations by the end of the year.

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