Lucrative Set-Aside and
Sole Source Federal Contracting Opportunities Exist for Small Businesses
Small businesses are eligible
for unique contracting opportunities with the Federal Government, including the
right to compete for contracts set-aside exclusively for small businesses and
to receive contracts on a sole source basis. Competitive and sole-source contracts may be set-aside for:
·
Small businesses
generally;
·
Small, disadvantaged
businesses under the Section 8(a) Business Development Program (the “8(a)
Program”) or the Small Disadvantaged Business (“SDB”) Program; or
·
Small companies located
in Historically Underutilized Business Zones ("HUBZones").
To be eligible for these
set-asides and sole source contracts (and also for price evaluation preferences
under certain SBA Programs), a company must meet the definition of a “small business
concern” as defined by the SBA and, with regard to the 8(a), SDB, and HUBZone
Programs, must be SBA certified as meeting other eligibility requirements. One such requirement is that the
company be at least 51% owned by
U.S. citizens.
Whether a company qualifies
as a small business concern is determined by looking at the average annual
receipts or numbers of employees of the company and its affiliates over
a three year period. Those annual
receipts or numbers of employees must fall below the applicable size standard
for the procurement at issue. The
size standards are based on the North American Industry Classification Systems
("NAICS") codes, some of which are revenue based and others of which
are employee based. The
contracting activity assigns whichever NAICS code best describes the principal
purpose of the product or service being acquired.
Where a small business relies
upon venture capital (“VC”) financing, the definition of affiliation is
important. Affiliation arises
where one party controls or has the power to control the other, or a third
party or parties controls or has the power to control both. SBA considers factors such as
ownership, management, previous relationships with another concern, and
contractual relationships, in determining whether affiliation exists. A person (including any individual,
concern, or other entity) that owns, or has the power to control, 50% or more
of a concern’s voting stock, or a block of voting stock which is large compared
to other outstanding blocks of voting stock, controls or has the power to
control the concern.
SBA does not exempt VC firms
from the affiliation rules applicable to Federal procurements (unless the firm
qualifies as an investment company licensed, or development company qualifying,
under the Small Business Investment Act of 1958, as amended). Therefore, given the typical conditions
of venture capital financing, many VCs will be deemed affiliated with their small
business clients (and may even result in the clients themselves being
affiliated with each other). For
example, if a VC has a majority stock interest in their client(s), or the
ability to control, direct, or veto the corporate decisions of their client(s),
SBA will find that the VC and its client are affiliated. SBA will then include the revenues and
numbers of employees of not only the small business itself, but also the large VC
(and perhaps even its other clients) in determining the size of the business.
In conclusion, affiliation
can have dire consequences for a small business that receives VC financing. A finding of affiliation between a
small and a large VC will blow the size status of the small business. The result: the small business will be
deemed large, no longer eligible for certification under the 8(a), SDB, and HUBZone
Programs, and ineligible for Federal contracting opportunities reserved exclusively
for small businesses. Accordingly,
VCs must carefully consider the ramifications of taking a majority interest in
the voting stock and/or insisting upon controlling the decisions of their small
business clients as a condition of granting financing to the small business. For more information, please contact
Jennifer Ranji of WolfBlock Public Strategies at 202-789-4040 or
jranji@wolfblock.com
