In the Small Business Administration’s (SBA) October 2019 Final Rule covering Consolidation of Mentor-Protégé Programs and Other Government Contracting Amendments, SBA also included modification to two of the affiliation tests under 13 C.F.R. § 121.103.
(Note, SBA made a number of other changes to 13 C.F.R. § 121.103 focused on the joint venture affiliation test.)
Identity of Interest
With respect to the “identity of interest” test in § 121.103(f)(2), the SBA has added one additional method by which an entity can rebut the presumption of economic dependence. Under the current iteration of the rule, SBA can presume an identity of interest based upon economic dependence if one concern derives 70 percent or more of its receipts from another concern over the previous three fiscal years. The concern can only rebut that presumption by showing that it has only been in business a short while and has not had the opportunity to secure contracts separately.
Now, the presumption is also rebuttable by a showing that the contractual relation does not restrict the concern in question from selling the same type of products or services to another purchaser. SBA added an example of the application of this new basis to rebut the presumption: if over a five-year period, 195 of Firm A’s 200 contracts are with Firm B and represent greater than 70% of Firm A’s revenue over the past 3 years, SBA will likely find the two affiliated unless Firm A “can show that its contractual relations with Firm B do not restrict it from selling the same type of products or services to another purchaser.”
Newly Organized Concern Rule
With respect to the “newly organized concern” test in § 121.103(g), SBA is adjusting the test to reflect that affiliation may arise where both former and current officers, directors, principal stockholders, managing members, or key employees of one concern organize another concern that meets that satisfies all the prongs of this test. Currently, the rule only provides for affiliation based on former key individuals, but now the test will ensure that affiliation may arise where the key individuals are still associated with the first company.
And, although SBA indicated that entities and entity-owned firms are already excepted from affiliation under the newly organized concern rule by § 121.103(b)(2), SBA put in clarifying language to ensure that the newly organized concern rule cannot be read to contradict the 8(a) rule that permits a manager of a tribally-owned concern to manage two Program Participants at the same time (at 13 C.F.R. § 124.109(c)(4)(iii)
While SBA notes that § 121.103(b)(2) already excepts tribes, ANCs and NHOs and entity-owned firms, SBA added clarifying language in order to ensure that the “newly organized concern” rule is not misapplied to such entities. Now, this test will not apply where an individual currently manages two 8(a) program participants at the same time pursuant to § 124.109(c)(4)(iii).