On August 24, 2016, the new rule establishing an expanded mentor-protégé program of the Small Business Administration (SBA) took effect. Formerly, the mentor-protégé program was limited to participants in the SBA 8(a) program, which is only available to businesses owned by socially and economically disadvantaged individuals. The new program expands the mentor-protégé program to—
- Service-disabled veteran-owned small business concerns (SDVO SBCs).
- Historically underutilized business zone (HUBZone) programs (for economically distressed areas).
- Women-owned small business (WOSB) programs.
- All small businsses.
Congress mandated the expansion of the program in the Small Business Jobs Act of 2010 and the National Defense Authorization Act for 2013.
The new rule will allow all SBC entities that have entered into a mentor-protégé relationship that has been approved by SBA to enter into joint ventures with their mentors. Consequently, the new rule has the potential to greatly benefit both small and large businesses. Here is a summary of key elements of the new rule.
Joint-venture agreements must be in writing
Previously, there had been some confusion about how joint-ventures could be established—through the use of a limited liability company vs. a simple contract. The new rule makes it clear that either approach is acceptable so long as there is a written agreement establishing the joint venture. Furthermore, the joint venture must do business under its own name and be registered under that name in the System for Award Management (SAM). The new rule prohibits the use of “populated” joint ventures—meaning the joint venture cannot use its own employees to perform the contract awarded to the joint venture. Instead, the work must be performed by employees of the joint venturers. 13 C.F.R. § 121.103(h).
HUBZone participants can have non-HUBZone protégés
Previously, only two HUBZone participants could be in a mentor-protégé program. Under the new rule, the mentor does not have to be another HUBZone participant. This change allows large businesses and non-HUBZone SBCs to participate in the program, thereby providing better resources and business partners for the HUBZone participant, but SBA must approve the mentor. 13 CF.R. § 126.616.
Mentors can no longer be non-profit entities
This requirement came about because of the laws passed by Congress. 80 F.R. 6621.
SBA must approve all mentor-protégé programs established by agencies
When Congress passed the laws mandating the mentor-protégé programs, it also mandated that all agency programs must be approved by the SBA—except for the program established by the U.S. Department of Defense. 13 C.F.R. § 125.10.
If protégé qualifies as small, the joint venture qualifies as small
This allows a joint venture between a protégé and mentor that is not a small business to be awarded a contract so long as the protégé meets the size requirement of the procurement. But this doesn’t make the joint venture eligible for participation in set-asides for 8(a), HUBZone, SDVO, or WOSB programs unless the protégé qualifies for those programs. In addition, the project manager for the awarded contract must not be an employee of the mentor. 13 C.F.R. § 124.520 and 125.9.
Mentor-protégé agreements must be in writing and must be approved in advance by SBA
The SBA will also review such agreements and evaluate whether they have been effective in assisting protégés. 13 C.F.R. § 124.520 and 25.9.
Bottom line for government contractors
The new rule provides valuable new opportunities for both small and large businesses, but also poses potential pitfalls that must be carefully navigated.
Items on this web page are general in nature. They cannot—and should not—replace consultation with a competent legal professional. Nothing on this web page should be considered rendering legal advice.