[Senate Report 110-447]
[From the U.S. Government Publishing Office]



                                                       Calendar No. 943
110th Congress                                                   Report
                                 SENATE
 2d Session                                                     110-447

======================================================================



 
                 SBIR/STTR REAUTHORIZATION ACT OF 2008

                                _______
                                

                August 22, 2008.--Ordered to be printed

     Filed under authority of the order of the Senate of August 22 
                   (legislative day, August 1), 2008

                                _______
                                

 Mr. Kerry, from the Committee on Small Business and Entrepreneurship, 
                        submitted the following

                              R E P O R T

                         [To accompany S. 3362]

    The Committee on Small Business and Entrepreneurship, to 
which was referred the bill (S. 3362) to reauthorize the SBIR 
and STTR programs, and for other purposes, having considered 
the same, reports favorably thereon and recommends that the 
bill do pass.

                  I. Purpose and Need for Legislation

    The purpose of the ``SBIR/STTR Reauthorization Act of 
2008'' is to reauthorize, make current, and improve the Small 
Business Innovation Research (SBIR) and Small Business 
Technology Transfer (STTR) programs. The SBIR program needs to 
be reauthorized because it was set to sunset on September 30, 
2008. The program has been extended through March 20, 2009, as 
part of a temporary reauthorization bill for all of the Small 
Business Administration's programs (S. 3026, P.L. 110-235, 
signed into law May 23, 2008), but needs to be fully 
reauthorized. The Committee believes that these programs are 
needed in order to stimulate America's innovation economy, to 
remedy the continued underrepresentation of small businesses in 
federal research and development, and to use small businesses 
to help government agencies meet national needs. Small 
businesses continue to receive only about 4 percent of federal 
research and development dollars despite the fact that small 
businesses employ about one-third of America's scientists and 
engineers, produce more patents than large businesses and 
universities, and are powerful vehicles for the dissemination 
of scientific and technical knowledge.\1\ SBIR and STTR are two 
of the very few federal programs that utilize this largest 
sector of the scientific and technological community.
---------------------------------------------------------------------------
    \1\National Science and Engineering Indicators 2003, National 
Science Foundation, Division of Science Resources Statistics. See also, 
Testimony of NSBA member Robert Schmidt before the House Subcommittee 
on Technology and Innovation, Committee on Science and Technology, 
``Reauthorization of the Small Business Innovation Research Programs 
and `Unleashing American Innovation,''' 110th Congress, April 26, 2007.
---------------------------------------------------------------------------
    It is important to reauthorize these two worthy and highly 
successful programs for economic and national security reasons. 
Globalization, in particular, has resulted in increased 
competition and a new series of challenges to the economic and 
military preeminence America has enjoyed since World War II. In 
a comprehensive evaluation of the state of American innovation, 
the National Academy of Sciences' report, Rising Above the 
Gathering Storm, underscored the dangers the United States 
faces in science and technology:

          The scientific and technological building blocks 
        critical to our economic leadership are eroding at a 
        time when many other nations are gathering strength . . 
        . We are worried about the future prosperity of the 
        United States. Although many people assume that the 
        United States will always be a world leader in science 
        and technology, this may not continue to be the case 
        inasmuch as great minds and ideas exist throughout the 
        world. We fear the abruptness with which a lead in 
        science and technology can be lost--and the difficulty 
        of recovering a lead once lost, if indeed it can be 
        regained at all.\2\
---------------------------------------------------------------------------
    \2\Committee on Prospering in the Global Economy of the 21st 
Century, Rising Above the Gathering Storm: Energizing and Employing 
America for a Brighter Economic Future, Kate Kelly ed. (National 
Academies Press, 2007), p. 3.

    Government-industry partnerships in innovation and research 
have become increasingly critical to keeping our nation 
competitive internationally and to fulfilling the needs of the 
American people.\3\ Together, SBIR and STTR form one of the 
largest such public-private partnerships in the nation, and 
they are essential to fulfilling the priority research needs of 
the country. Furthermore, these programs utilize the innovative 
capabilities of small businesses to create jobs, to stimulate 
local economies, and to commercialize ideas originally 
developed in our federal science agencies and universities. The 
SBIR and STTR programs also serve as powerful mechanisms to 
involve a diverse group of individuals, geographically and 
demographically, in federal research and development, thereby 
increasing competition, diversifying the government's supply 
base, and reducing costs. For these reasons, the programs need 
and deserve to be reauthorized, strengthened, and improved.
---------------------------------------------------------------------------
    \3\National Research Council, SBIR Challenges and Opportunities, 
Charles Wessner ed. (National Academies Press, 1999), p. 7.
---------------------------------------------------------------------------

                              II. Summary

    The ``SBIR/STTR Reauthorization Act of 2008'' (S. 3362) 
reauthorizes the Small Business Administration's (SBA) SBIR and 
STTR programs for 14 years each, through 2022 and 2023, 
respectively. The legislation gradually increases, over ten 
years, the allocation for the SBIR program at most 
participating agencies from 2.5 percent to 3.5 percent of the 
agency's extramural research and development budget, and, for 
the STTR program, it gradually increases, over six years, the 
allocation at all participating agencies from 0.3 percent to 
0.6 percent of this same budget. It increases the award size 
guidelines for the SBIR and STTR programs from $100,000 to 
$150,000 for Phase I and from $750,000 to $1 million for Phase 
II. Also, in order to protect against abuses in issuing 
``jumbo'' awards, the bill restricts agencies from making 
awards that are more than 50 percent larger than the 
guidelines. To increase geographic participation in the SBIR 
and STTR programs, particularly in rural states, S. 3362 
enhances and reauthorizes through 2014 the Federal and State 
Technology Partnership (FAST) program and the Rural Outreach 
Program (ROP). To help move SBIR and STTR technologies across 
the ``valley of death'' (a phrase used to describe the funding 
gap between Phases II and III or commercialization), the 
legislation extends and improves the Commercialization Pilot 
Program at the Department of Defense (DoD) and creates 
commercialization pilot programs at the other SBIR agencies, 
authorizing all such pilots through 2014. This bill includes a 
compromise on the issue of the participation of companies 
majority owned and controlled by multiple venture capital 
companies in the SBIR program, allowing the National Institutes 
of Health (NIH) to apply to award up to 18 percent of its SBIR 
dollars to companies majority owned and controlled by multiple 
venture capital companies and the other SBIR qualifying 
agencies to apply to award up to 8 percent of their SBIR 
dollars to this class of firms.\4\ The affiliation rule itself 
and the 500 employee standard remain unchanged in this bill. 
Last, the legislation seeks to improve oversight by giving more 
autonomy and resources to the Small Business Administration's 
Office of Technology, by building in regular assessments by the 
National Academy of Sciences, and by streamlining data 
collection and reporting requirements to help Congress better 
assess the programs' effectiveness, to guide future policy 
changes, and to address record-keeping problems identified by 
GAO and NAS in their reports on the program.
---------------------------------------------------------------------------
    \4\Participating agencies: at the time of Committee passage of S. 
3362, ten federal agencies (in addition to the Department of Health and 
Human Services) qualified to have SBIR programs. The agencies are as 
follows: Department of Defense, NASA, Department of Energy, National 
Science Foundation, Department of Homeland Security, Department of 
Agriculture, Department of Education, Department of Commerce, 
Environmental Protection Agency, and Department of Transportation.
---------------------------------------------------------------------------

                      III. History of the Program


          A. SMALL BUSINESS INNOVATION RESEARCH (SBIR) PROGRAM

1982 Establishment of SBIR: ``Small Business Innovation Development Act 
        of 1982'' (P.L. 97-219, S. 881, July 22, 1982)

    The federal SBIR program was created more than 25 years ago 
out of growing concern since the 1960s that, despite the 
increasing prominence of small businesses in innovation, 
federal research and development expenditures had 
disproportionately been awarded to large businesses. As a 
result, in 1976, Roland Tibbetts at the National Science 
Foundation (NSF) took the lead in directing a greater and more 
significant share of its extramural research and development 
funds to small business in a new innovation and research 
program, with a focus on discovering, funding, and evaluating 
the initial, highest-risk, most cutting-edge exploratory 
research that is necessary to achieve significant technological 
innovations and breakthroughs. The purpose was to make small 
but sufficient awards to test as many ideas as possible. The 
program at NSF led policymakers to consider taking further 
steps to unleash the innovative potential of small 
businesses.\5\ On August 9 and 10, 1978, the House and Senate 
Committees on Small Business held a joint hearing on the 
underutilization of small businesses in American innovation. 
There was a clear consensus that small businesses deserved a 
greater share of federal research and development funds, not 
only because of the innovative and development successes of 
small firms, but also because of their achievements in job 
creation and cost efficiency and their powerful contribution to 
the greater science and technology communities. The 1980 White 
House Conference on Small Business echoed these sentiments and 
recommended legislation to expand the NSF concept to other 
agencies.\6\ The end result of the recommendation was the Small 
Business Innovation Development Act of 1982, which first 
authorized the SBIR program (P.L. 97-219, S. 881, July 22, 
1982). The Act creating SBIR had four objectives:
---------------------------------------------------------------------------
    \5\Joint Hearings before the U.S. Senate Select Committee on Small 
Business and the U.S. House of Representatives Subcommittee on 
Antitrust, Consumer and Employment and Subcommittee on Energy, 
Environment, Safety and Research of the Committee on Small Business, 
``Underutilization of Small Business in the Nation's Efforts to 
Encourage Industrial Innovation,'' 99th Cong. (1978) (Transcript of the 
two-day proceedings).
    \6\National Research Council, SBIR Challenges and Opportunities, 
1999.
---------------------------------------------------------------------------
          1. To stimulate technological innovation;
          2. To use small business to meet federal research and 
        development needs;
          3. To foster and encourage participation by minority 
        and disadvantaged persons in technological innovation; 
        and
          4. To increase private sector commercialization of 
        innovation derived from federal research and 
        development.
    The intent of the 1982 Act and the original NSF program was 
not for the SBIR program to be merely a commercialization 
program. Small businesses in SBIR were designed to be vehicles 
for fulfilling the priority research needs of federal agencies 
and the nation at large while stimulating local economies. 
Further, as mentioned earlier, the program was designed to fund 
as many ideas as possible, rather than to take only a few ideas 
from concept to market or insertion into a government product 
or technology. The allocation of funds for SBIR in its first 
year of existence totaled $45 million, or 0.2 percent of the 
extramural research and development budgets of federal agencies 
that had extramural research and development budgets that 
exceeded $100 million. Per P.L. 97-219, the allocation was 
gradually increased over six years, until the final mandated 
allocation for SBIR of 1.25 percent was reached. Modeled after 
the NSF program, the program was structured in three phases. 
Phase I awards were modest and capped at $50,000 and were meant 
to test the feasibility of an idea or product. Phase II awards, 
capped at $500,000, were meant to be used to begin product 
development and prototyping. In Phase III, the graduation stage 
of SBIR, small businesses were to obtain outside funding, 
whether private funding or non-SBIR federal funding, to 
continue development toward a commercial product or products or 
systems to further the mission of an agency.\7\ P.L. 97-219 
authorized the SBIR program for six years, through 1988.
---------------------------------------------------------------------------
    \7\National Research Council, SBIR Challenges and Opportunities, 
Charles Wessner ed. (National Academies Press, 1999), pp. 18-21.
---------------------------------------------------------------------------

1986 SBIR Extension: ``A bill to provide the Small Business 
        Administration continuing authority to administer a program for 
        small innovative firms'' (P.L. 99-443, H.R. 4260, Oct. 6, 1986)

    SBIR was not set to expire until 1988, six years after its 
establishment, but, due to the program's political support, in 
1986, it was extended for another seven years, through 1993.

1992 SBIR Reauthorization: ``Small Business Research and Development 
        Enhancement Act of 1992'' (P.L. 102-564, S. 2941, Oct. 28, 
        1992)

    The next congressional review of the program came with the 
``Small Business Research and Development Enhancement Act of 
1992,'' which reauthorized SBIR for eight years, through FY 
2000, and made several modifications to the program. Lawmakers 
praised SBIR for its accomplishments in commercialization and 
towards its other goals in innovation and research over its 
first ten years of operation. The SBIR allocation was doubled 
to 2.5 percent, and award sizes were increased for Phase I to 
$100,000 and for Phase II to $750,000. Among the arguments put 
forth to justify the increase to the SBIR allocation were that 
the SBIR program had been ``an effective catalyst for the 
development of technological innovations'' and that small firms 
in SBIR ``[had] provided high quality research and development 
in a cost-effective manner.''

2000 SBIR Reauthorization--P.L. 106-554. ``Small Business 
        Reauthorization Act of 2000'' (P.L. 106-554, H.R. 5667, Dec. 
        21, 2000)

    In 2000, the SBIR program was again reauthorized and 
extended for eight years, through September 30, 2008. The House 
bill incorporated changes to SBIR originally outlined in the 
Senate bill, S. 3236. The final legislation emphasized the need 
for systematic evaluation of the program and mandated a 
comprehensive evaluation by the National Academy of Sciences 
(NAS) of SBIR at federal agencies with an SBIR budget greater 
than $50 million. The law also established the FAST, created to 
increase the participation of small firms across the country in 
the SBIR program.

2008 SBIR Temporary Extension--P.L. 110-235. ``An Act to provide for an 
        additional temporary extension of programs under the Small 
        Business Act and the Small Business Investment Act of 1958'' 
        (P.L. 110-235, S. 3029, May 23, 2008)

    The SBIR program was extended through March 20, 2009, by S. 
3029, ``An Act to provide for an additional temporary extension 
of programs under the Small Business Act and the Small Business 
Investment Act of 1958,'' signed into law as P.L. 110-235 on 
May 23, 2008. This legislation amended P.L. 109-136, which 
temporarily authorized through February 2, 2007, any program, 
authority, or provision, including any pilot program, 
authorized under the Small Business Act or the Small Business 
Investment Act of 1958 that was scheduled to expire on or after 
September 30, 2006, but before February 2, 2007, by 
substituting March 20, 2009, for the 2007 date. Since the SBIR 
program was set to expire on September 30, 2008, the program 
was temporarily extended under this Act and is currently set to 
sunset on March 20, 2009.
    This temporary extension of the sunset date was important 
because the previous sunset date of September 30, 2008, was 
fast approaching and the likelihood of passing legislation 
through both houses of Congress, reconciling the differences, 
and enacting it into law before September 30, 2008, was low. 
The extension, which covered all of the SBA's programs, gives 
Congress additional time to complete the comprehensive SBIR 
reauthorization process, while preventing the agencies from 
slowing down or shutting down their SBIR programs, as happened 
around the time of the 2000 reauthorization, hurting many small 
businesses and delaying research.

          B. SMALL BUSINESS TECHNOLOGY TRANSFER (STTR) PROGRAM

Establishment of STTR: ``Small Business Research and Development 
        Enhancement Act of 1992'' (P.L. 102-564, S. 2941, Oct. 28, 
        1992)

    This legislation not only reauthorized the SBIR program, as 
discussed above, but also created, as a pilot, the Small 
Business Technology Transfer program. The goal of this program, 
which complements the SBIR program, was to stimulate 
partnerships between small businesses and non-profit research 
institutions, such as universities and federally funded 
research laboratories. STTR likewise has three phases, 
corresponding to the three phases in SBIR, and the two programs 
operate in a similar fashion and have similar goals. STTR was 
also designed to convert the billions of dollars invested in 
research and development at our nation's universities, federal 
laboratories, and non-profit research institutions into new 
commercial technologies. P.L. 102-564 required federal agencies 
with an extramural research and development budget of $1 
billion or more to dedicate 0.05 percent of this budget to the 
STTR program in 1994, 0.1 percent in 1995, and 0.15 percent in 
1996--the three years for which it was authorized.

1996 STTR Extension: ``Omnibus Consolidated Appropriations Act, 1997'' 
        (P.L. 104-208, H.R. 3610, Sept. 30, 1996)

    This legislation extended the STTR pilot program for one 
year and maintained the 1996 allocation level of 0.15 percent 
of the extramural research and development budget of 
participating agencies. This made the new sunset date September 
30, 1997.

1997 STTR Reauthorization: ``Small Business Reauthorization Act of 
        1997'' (P.L. 105-135, S. 1139, Dec. 2, 1997)

    In the 105th Congress, the STTR program was extended 
through 2001 by S. 1139. This bill also established the Rural 
Outreach Program, designed to increase the participation of 
small business concerns in areas with low participation rates 
in the SBIR and STTR programs.

2001 STTR Reauthorization: ``The Small Business Technology Transfer 
        Program Reauthorization Act of 2001'' (P.L. 107-50, H.R. 1860, 
        Oct. 15, 2001)

    This bill reauthorized the STTR program for 8 years and 
doubled the STTR allocation from 0.15 percent to 0.3 percent of 
the external research and development budget of federal 
agencies with an external research and development budget of $1 
billion or more. The STTR program is currently set to sunset on 
September 30, 2009.

           IV. History of Legislation and Votes in Committee 

    The ``SBIR/STTR Reauthorization Act of 2008'' (S. 3362) was 
introduced by Senator John F. Kerry, for himself and Senator 
Snowe, on July 29, 2008. As introduced, the bill reauthorizes 
the Small Business Innovation Research and Small Business 
Technology Transfer programs for 14 years each, through 
September 30, 2022, and September 30, 2023, respectively. The 
bill was passed by the Committee by a roll call vote of 19-0 on 
July 30, 2008.
    S. 3362 incorporated many of the SBIR and STTR provisions 
adopted by the Committee in the 109th Congress as part of S. 
3778, the ``Small Business Reauthorization and Improvements Act 
of 2006,'' which Senator Snowe, then chair of the Committee, 
introduced as an original bill on August 2, 2006. The text of 
that legislation was reported out of the Committee unanimously, 
by a vote of 18-0, on July 27, 2006. According to Senate 
procedure, original bills reported from a Committee may only be 
introduced by one Senator; however, members of the Committee 
wishing to cosponsor the bill included Senators Kerry, Vitter, 
Lieberman, Landrieu, and Cantwell. S. 3778 was never considered 
by the full Senate before the adjournment of the 109th 
Congress. While the framework for this legislation to 
reauthorize the SBIR and STTR programs and much of its text was 
derived from S. 3778, several changes were incorporated to 
address concerns that contributed to preventing the bill from 
receiving consideration in the full Senate in the 109th 
Congress.
    S. 3362 also incorporated provisions from S. Amdt. 3023, 
submitted by Senators Kerry and cosponsored by Senator Snowe on 
September 24, 2007, to extend and improve the SBIR 
Commercialization Pilot Program (CPP) at the Department of 
Defense. The amendment was proposed for Senator Kerry by 
Senator Levin and agreed to in the Senate on September 25th. It 
amended H.R. 1585, the National Defense Authorization Act for 
Fiscal Year 2008. S. Amdt. 3023 was not included in the final 
version of this legislation that became P.L. 110-181 on January 
28, 2008, because the House Committees on Small Business and 
Science opposed it in conference. The CPP at the Department of 
Defense was established in the 108th Congress by P.L. 109-163 
(S. 1042/ H.R. 1815), via S. Amdt. 2531, an amendment offered 
by Senator Snowe and cosponsored by Senator Kerry on November 
15, 2005. That amendment incorporated S. Amdts. 1504, 1536, 
1537, and 1594, previous amendments offered by Senators Snowe 
and Kerry to S. 1042. The Commercialization Pilot Program has a 
sunset date of September 30, 2009, and S. 3362 would extend it 
through 2014.
    S. 3362 also incorporated provisions from S. 2988, Senator 
Lieberman's ``Accelerating Cures Act of 2008,'' S. 3274, 
Senator Kerry's ``National Nanotechnology Initiative Amendments 
Act of 2008,'' and S. 3343, Senator Landrieu's ``Rural Small 
Business Enhancement Act of 2008,'' all introduced in the 110th 
Congress.
    The SBIR and STTR programs and the provisions in S. 3362 
were deliberated in a series of hearings and roundtables in the 
109th and 110th Congress.
    On July 12, 2006, the Committee held a hearing entitled 
``Strengthening Participation of Small Businesses in Federal 
Contracting & Innovation Research Programs.'' The purpose was 
to discuss the state of the SBIR program and the challenges and 
opportunities inherent in it in anticipation of legislation to 
reauthorize the program (S. 3778). Witnesses included members 
of the Small Business Technology Counsel, members of the 
Biotechnology Industry Organization, owners of businesses in 
the biotechnology sector that had received significant amounts 
of venture capital and those that had not, persons familiar 
with SBIR initiatives on the state level, and the lead on the 
comprehensive National Academy of Sciences study of the SBIR 
program. The Committee heard testimony both for and against 
allowing companies majority owned and controlled by multiple 
venture capital firms to participate in the program and covered 
issues ranging from the appropriateness of award sizes to how 
best to increase the diversity of the program, both 
geographically and demographically.
    On August 1, 2007, the Committee held a roundtable, 
``Reauthorization of the Small Business Innovation Research 
Program: National Academies' Findings and Recommendations,'' to 
follow-up on the 2006 hearing and to bring the discussion on 
reauthorization up-to-date by inviting the National Academies 
to present the results of its overall assessment of the SBIR 
program. In addition to NAS, a variety of stakeholders 
participated in the roundtable, including SBIR program managers 
at federal agencies, staff of the Office of Technology at the 
SBA, small business owners, trade association representatives, 
and providers of technical assistance to SBIR award recipients. 
The discussion was wide-ranging and gave participants the 
opportunity to provide feedback on the findings and 
recommendations of the NAS report, providing the Committee with 
further insight into a number of issues relevant to 
reauthorization.
    On October 18, 2007, the Committee held another roundtable, 
``Reauthorization of the Small Business Innovation Research 
Program: How to Address the Valley of Death, the Role of 
Venture Capital, and Data Rights,'' in order to expand upon 
previous discussions of these three critical issues. 
Participants again included program managers at federal 
agencies and staff of the SBA Office of Technology, as well as 
small business owners in a variety of industries. The 
roundtable focused on initiatives in effect at SBIR agencies to 
help small businesses move their innovative technologies across 
the ``valley of death'' from the laboratory to the marketplace, 
the debate over the involvement of companies majority owned and 
controlled by multiple venture capital firms in the SBIR 
program, and the problems inherent in how SBIR data rights are 
treated by federal agencies and prime contractors.
    The National Academy of Sciences and the Government 
Accountability Office issued several reports on the program 
since the 2000 reauthorization of SBIR that have guided the 
work of the Committee in drafting S. 3362.
    NAS Studies: In order to better measure the progress of the 
SBIR program toward its objectives, when the SBIR program was 
reauthorized for eight years in 2000 (P.L. 106-554), Congress 
requested a comprehensive external evaluation by the National 
Academy of Sciences (NAS) of SBIR at federal agencies with an 
SBIR budget greater than $50 million. The goals of the studies 
were to determine how SBIR has stimulated innovation and used 
small firms to meet the research needs of the nation and to 
provide overall recommendations for the program. The result of 
the five-year, $5 million review by the NAS was a series of 
reports, issued beginning in 2007.
    The National Academies' comprehensive assessment of SBIR, 
``An Assessment of the Small Business Innovation Research 
Program,'' was published in July 2007. The core finding of the 
NAS study was that the SBIR program is ``sound in concept and 
effective in practice.'' The report also included the following 
short summary of the SBIR program:

          ``The program is proving effective in meeting 
        Congressional objectives. It is increasing innovation, 
        encouraging participation by small companies in federal 
        research and development, providing support for small 
        firms owned by minorities and women, and resolving 
        research questions for mission agencies. Should 
        Congress wish to provide additional funds for the 
        program in support of these objectives, with the 
        programmatic changes recommended, those funds could be 
        employed effectively by the nation's SBIR program.''\8\
---------------------------------------------------------------------------
    \8\National Research Council, ``An Assessment of the Small Business 
Innovation Research Program,'' 2007.

    The NAS report also found that the SBIR program is 
effectively linking universities to public and private markets, 
increasing private sector commercialization of innovations, 
creating new companies, and providing widely distributed 
support for innovation activity. The report included a number 
of recommendations designed to strengthen and improve the 
program, including: a readjustment of the award sizes to 
$150,000 for Phase I and $1 million for Phase II, preservation 
of the basic three-phase structure of the program, regular 
external and internal evaluation, an increased emphasis on 
pilot programs, and more vigorous efforts to reach out to 
diverse sectors of the population, geographically and 
demographically, in order to improve rates of participation in 
the program across the country.
    Agency or topic-specific studies published by NAS in 
accordance with the mandate to evaluate the program originating 
in P.L. 106-554 include:
           An Assessment of the SBIR Program at the 
        Department of Energy (June 2008)
           An Assessment of the SBIR Program at the 
        Department of Defense (November 2007)
           An Assessment of the SBIR Program at the 
        National Institutes of Health (November 2007)
           An Assessment of the SBIR Program at the 
        National Science Foundation (July 2007)
           An Assessment of the Small Business 
        Innovation Research Program (July 2007)
           SBIR and Phase III Challenge of 
        Commercialization (February 2007)
           SBIR: Program Diversity and Assessment 
        Challenges (September 2004)
           Capitalizing on Science, Technology, and 
        Innovation: An Assessment of the Small Business 
        Innovation Research Program--Project Methodology 
        (September 2004)
    The wealth of information uncovered by this comprehensive 
effort to study the SBIR program informed the Committee's work 
in drafting reauthorization legislation. Additional NAS studies 
to be released include:
           An Assessment of the SBIR Program at the 
        National Aeronautics and Space Administration (In 
        Review)
           Revisiting the Department of Defense SBIR 
        Fast Track Initiative (In Draft)
           Venture Funding and the NIH SBIR Program (In 
        Draft)
    GAO Study: Additionally, GAO conducted a review of the SBIR 
program at the request of Senators Kerry and Kennedy, later 
joined by Senators Snowe and Enzi and Congressman Manzullo, 
that studied the impact of a 2002 SBA Office of Hearings and 
Appeals decision that clarified the definition of a small 
business for the purposes of the SBIR program. The purpose of 
the review was to look at the agencies with the largest SBIR 
budgets to examine the extent to which firms with venture 
capital participated before and after the clarification, 
including those firms majority owned and controlled by multiple 
venture capital companies. The goal of the study was to 
determine what role venture capital and firms majority owned 
and controlled by multiple venture capital companies should 
play in the SBIR program, as well as the impact that the 
participation of these firms had on the program and the 
country's innovation.
    The report, entitled ``Small Business Innovation Research: 
Information on Awards Made by NIH and DoD in Fiscal Years 2001 
through 2004,''\9\ was released in April of 2006. It found 
that, over the period of the study, the number of awards and 
dollars to firms with venture capital went up at both the 
National Institutes of Health and the Department of Defense and 
the percentage of SBIR dollars to firms with venture capital 
went up at the National Institutes of Health and held steady at 
the Department of Defense. Due to a lack of publically 
available data on the ownership structure of firms with venture 
capital, it was not possible for GAO to determine which firms 
were majority owned and controlled by venture capital 
companies; however, it is generally acknowledged that the 
numbers from Fiscal Years (FY) 2001 and 2002 included awards to 
firms with venture capital, both majority owned and not, and 
that the numbers from FYs 2003 and 2004 did not include 
majority owned firms. The report also found that, on balance, 
firms with venture capital received larger awards, oftentimes 
well in excess of the established award levels of $100,000 for 
Phase I and $750,000 for Phase II, and that awards were 
concentrated in a limited number of states. These findings 
helped to frame the Committee's deliberations on the matter of 
allowing businesses owned and controlled by multiple venture 
capital companies to be eligible to receive awards in Phases I 
and II of the SBIR program.
---------------------------------------------------------------------------
    \9\GAO-06-565
---------------------------------------------------------------------------

                        IV. Description of Bill


Title I

    Section 101 of the ``SBIR/STTR Reauthorization Act of 
2008'' reauthorizes the SBIR and STTR programs for 14 years. 
Congress has a history of reauthorizing the SBIR program for 
long periods, including reauthorizations of eight years in 1992 
and 2000. In 2006, the Committee on Small Business and 
Entrepreneurship attempted to make the program permanent as 
part of S. 3778. The SBIR program had existed for 24 years and 
had proven effective, and the Committee agreed that it was time 
to make the program permanent. The small business community 
also argued that the program should be made permanent, not only 
because it had proven effective, but also because it should be 
stable and not in jeopardy of lapsing. They feared a 
reoccurrence of what happened in 2000, when the program was 
last set to expire; the program was not reauthorized by 
September 30th and was not considered to be authorized under 
the series of continuing resolutions.
    However, opponents of making the program permanent argued 
that, without reauthorizations built into the program, Congress 
would not regularly assess the program and make needed changes. 
Therefore, striking a balance between permanency and past 
longer reauthorizations, this bill extends the program for 14 
years. A reauthorization of 14 years factors in the increase in 
the SBIR allocation, which is phased in over ten years, and 
sets the date so that it does not coincide with a presidential 
election year. The bill addresses concerns of oversight by 
building in assessments by the NAS to be published every four 
years.
    Section 102 concerns the SBA's Office of Technology. 
Efforts to strengthen American competitiveness through small 
businesses begin with this office, which administers and 
monitors the implementation of both the SBIR and the STTR 
programs government-wide. As these programs have grown, the 
responsibilities of the Office have increased, such as to 
monitor government-wide compliance with the SBA's SBIR and STTR 
Policy Directives, to carry out the FAST and ROP programs, and 
to carry out the President's Executive Order 13329, Encouraging 
Innovation in Manufacturing. At the same time, the budget and 
staff for this Office have decreased. More specifically, since 
FY 1991, the SBIR and STTR programs have more than doubled, 
growing from $500 million to about $2 billion a year, yet the 
budget for the Office of Technology has been cut by more than 
half. According to the SBA's ``Historical Summary, Office of 
Technology,'' in 1991, the Office of Technology had a budget of 
$907,000 and 10 positions. Today, the Office of Technology has 
a budget of $41,000 and four positions.
    The Committee has raised this issue with the agency on 
numerous occasions over the years, in budget and confirmation 
hearings and in letters, yet the problem has only gotten worse 
with regard to the resources and stature for this office. 
Consequently, there has been inadequate oversight of 
participating agencies' compliance with the 2.5 percent 
allocation requirement, as well as of other compliance 
violations that have put at risk significant SBIR dollars. For 
example, at the Missile Defense Agency, at risk was $75 million 
in FY 2002 and $93 million in FY 2003; at the Air Force, in FY 
2005, at risk was $175 million; and, in FY 2007, at risk was 
$260 million at the Army and Air Force. Congress intervened to 
ensure that the agencies awarded the appropriate amount in SBIR 
awards as opposed to transferring money to other accounts. As 
another example, the SBA's FY 2003 annual reports on the SBIR 
and STTR programs reported two different Department of Defense 
extramural budgets for research and development (the budget in 
one report exceeding the same budget in another report by about 
$3 billion), and, despite that significant discrepancy, the SBA 
did not have the resources to adequately review the reports to 
determine which one was correct and wrongly declared that the 
Department of Defense and other agencies complied with the SBIR 
and STTR programs' requirements.
    The Committee urges the agency to request that the Office 
of Management and Budget (OMB) and the Administration support 
requests which are reasonable for the Office of Technology to 
successfully operate and to carry out its management, data 
collection, and reporting requirements. This is particularly 
important given that this legislation places added emphasis on 
data collection and database maintenance, in order to remedy 
comments included in the NAS report and the GAO report that the 
SBIR and STTR programs are insufficiently data-driven. For 
example, right now, the most recent state-by-state award 
information available on SBA's website dates to 2004, at least 
two years behind what should be available. The Office of 
Technology simply does not have the staff or funding to 
maintain even basic functions. Also, the bill requires that the 
Office of Technology be headed by an Assistant Administrator 
for Technology who will report only to the Administrator and 
that the office be independent from the Office of Government 
Contracting. The SBIR and STTR programs, which the Office of 
Technology is charged with overseeing, disburse billions of 
dollars in awards on an annual basis, and the Committee 
believes that it must have the stature and resources to defend 
the interests of small businesses that utilize these cross-
agency programs.
    To stimulate America's innovation economy and to remedy the 
continued underrepresentation of small businesses in federal 
research and development, sections 103 and 104 of the bill 
increase the allocations for both programs, from 2.5 percent to 
3.5 percent for SBIR and from 0.3 percent to 0.6 percent for 
STTR. These increases are to be phased in over the course of 
ten years in the case of SBIR and six years in the case of 
STTR, in order to allow the agencies to adjust to the increase. 
The increase in the SBIR allocation would not apply to the 
Department of Health and Human Services, and, at the 
Departments of Defense and Energy, the additional funds would 
be used, to the greatest extent possible, for the purposes of 
furthering the technology readiness levels of SBIR projects, 
including to conduct testing and evaluation, and not for Phase 
I and Phase II awards. Given the successes of the SBIR and STTR 
programs and the high praise they have garnered from the 
National Academy of Sciences, the Committee believes that these 
increases to the allocations are warranted.
    Further, the increases are moderate compared to past 
legislation. A doubling of the allocation was proposed in S. 
2111, the ``Small Business Growth Initiative Act of 2005,'' 
introduced on December 15, 2005, by Senator Evan Bayh, and 
later passed unanimously by the Committee as part of S. 3778, 
the ``Small Business Reauthorization and Improvements Act of 
2006,'' introduced by Senator Snowe in the 109th Congress. 
However, the bill was never considered by the full Senate, in 
part because of holds that this provision and other provisions 
generated, and all subsequent proposed increases in the SBIR 
allocation have been strongly opposed by some, in part based on 
arguments that such increases were not warranted in the absence 
of a systematic and comprehensive performance evaluation to 
determine the success of the program.
    The Committee is not indifferent to these criticisms. 
However, a systematic and comprehensive evaluation of SBIR by 
the National Academy of Sciences is now available and its 
conclusions are unequivocally positive for the SBIR program. 
Evidence from this respected source suggests that the SBIR 
program both contributes to university research and education 
in science and technology and is an important catalyst for 
bringing basic research out of labs and into the marketplace. 
Small businesses employ twice as many scientists and engineers 
as all American universities combined and the SBIR program has 
the implicit goal of utilizing the innovative capacities of 
this large sector of the science and technology community and 
linking it to the resources of academic research 
institutions.\10\ The 2007 National Academy of Sciences 
assessment of SBIR applauds the program's contribution towards 
linking universities and small businesses in innovation, as is 
evident by the following facts:
---------------------------------------------------------------------------
    \10\National Science Foundation, Science and Engineering Indicators 
2006.
---------------------------------------------------------------------------
           More than two-thirds of SBIR companies 
        report that at least one founder was previously an 
        academic;
           About one-third of SBIR company founders 
        were most recently employed as academics before 
        founding the company;
           Over a third of SBIR projects cite direct 
        university involvement with:
                   27 percent of projects having 
                university faculty as contractors on the 
                project;
                   17 percent using universities 
                themselves as subcontractors; and
                   15 percent employing graduate 
                students.
    It is clear that increases in the SBIR allocation will 
invest money in research, contracting, internships, and other 
collaborative activities done with universities, with the 
contracting and patenting activities with SBIR companies being 
a sizable source of revenue for universities as well. The 
university-industry partnerships that SBIR creates are crucial 
in that they provide an applied research and commercialization 
focus that otherwise likely would not be present in university 
research. More specifically, the partnerships are important in 
exposing faculty and the next generation of scientists and 
engineers to commercial research and development. SBIR 
businesses provide graduate and undergraduate students with 
hands-on experience and job opportunities that universities 
would be unable to provide alone. The STTR allocation increase 
will likewise benefit universities and efforts to bring 
university-based research into the commercial marketplace, as a 
partnership with a research institution, such as a university, 
is a requirement of all STTR award recipients.
    Furthermore, the same National Academy of Sciences report 
states that about half of small business respondents in SBIR 
across all agencies had results from their SBIR work published 
in a peer-reviewed scientific publication. In particular, at 
the National Institutes of Health, this percentage was high, 
with 53.5 percent companies publishing a scientific paper and 
two-thirds of those companies having published multiple 
times.\11\ This proves that SBIR projects are of high quality 
and that the program is a mechanism for the dissemination of 
knowledge across the science and technology community.
---------------------------------------------------------------------------
    \11\National Research Council, ``An Assessment of the Small 
Business Innovation Research Program at the National Institutes of 
Health,'' 2007.
---------------------------------------------------------------------------
    The Committee believes that the SBIR and STTR programs are 
vital to improving research and education in partnership with 
our nation's universities and federal agencies, as well as to 
unleashing American innovation and making the United States 
more competitive globally. Yet, the Committee understands the 
importance of basic research conducted by our federal agencies 
and universities, and, in light of tight federal research and 
development budgets, the Committee proposes a much more modest 
increase than the doubling of STTR that was included in S. 
3778. Further, as stated earlier in this section, there is no 
increase to the allocation at the Department of Health and 
Human Services, a major source of concern to universities and 
patient groups. The Committee would have preferred that there 
be an increase to the allocation at all SBIR agencies; however, 
it agreed to exempt the Department of Health and Human Services 
in order to prevent holds on the bill that threatened Senate 
passage of the bill before the program's expiration. Last, the 
allocation increases at the Department of Defense and the 
Department of Energy are directed to further the technology 
readiness levels of SBIR projects, but are not to be used for 
Phase I and Phase II awards.
    In order to adjust for inflation, acknowledge the growing 
costs of research, and sustain the quality of applications, 
section 105 of the bill proposes an increase in the award size 
guidelines, from $100,000 to $150,000 for Phase I awards and 
from $750,000 to $1 million for Phase II awards. The Committee 
believes that these increases in award size are timely, as the 
last increase in Phase I and Phase II awards was 16 years ago, 
in the 1992 reauthorization for SBIR. The ``Small Business 
Reauthorization and Improvements Act of 2006'' (S. 3778) 
proposed similar increases in award sizes, capping Phase I 
grants at the same $150,000 level but capping Phase II grants 
at $1.25 million. The award sizes in S. 3778 passed the 
Committee along with a doubling of the SBIR allocation. 
However, this bill does not increase the allocation to that 
extent. To increase the size of awards without substantially 
increasing the amount of dollars available necessarily reduces 
the number of awards that can be given and, consequently, the 
number of technologies developed and companies that benefit 
from SBIR. The award levels in this bill are intended to strike 
the appropriate balance between providing awardees with 
sufficient resources while continuing to generate ideas. The 
bill also mandates adjustments to these award levels every 
three years to account for inflation. Finally, these amounts 
are not caps but, rather, guidelines. However, the bill does 
include a cap as well, and the maximum Phase I or Phase II 
award would be one and a half times the size of the suggested 
award sizes.
    This cap serves to address the issue of jumbo awards that 
exceed the award guidelines and cut into the number of awards 
that can be given out by the agencies. For example, the 2006 
GAO review of the program found that NIH had made a Phase I 
award of $1.7 million and a Phase II award of $6.5 million. 
Small businesses, particularly those in rural states, have 
complained to the Committee for years that jumbo awards hurt 
them because they reduce the number of grants and awards that 
can be given out. In the case of a Phase I for $1.7 million, 
that eliminates the possibility of 16 awards of $100,000. In 
the case of a Phase II for $6.5 million, that eliminates the 
possibility of almost seven awards of $750,000. To address this 
issue, the bill prohibits federal agencies from making an award 
more than 50 percent higher than the guidelines established in 
this Act, which is a cap of $225,000 for Phase I awards and 
$1.5 million for Phase II awards. Per existing requirements, 
the agencies must also continue to report to the SBA when they 
exceed the guidelines amount of $150,000 and $1 million and 
provide a justification. The GAO and the NAS found that it was 
hard to assess the full impact of jumbo awards because the NIH, 
as well as other agencies, according to the NAS, did not comply 
with reporting requirements or provide sufficient 
justifications. The DoD had much better data, but the Committee 
believes that language is needed to strengthen the reporting 
requirements government-wide to help guide Congress in future 
policy decisions.
    Section 106 of the bill provides for portability of awards 
between different federal agencies and between the two SBIR and 
STTR programs by permitting eligible small business concerns to 
qualify for post-Phase I awards at another agency or through 
the other program. These measures ensure that small innovative 
businesses receive a full opportunity to participate in federal 
research and development and that the nation receives the full 
benefit of small business innovations. Today, research and 
development efforts to meet national priorities are conducted 
across federal agencies; for instance, the Departments of 
Energy and Agriculture work together on renewable energy 
research, and biodefense research is pursued by the Departments 
of Defense, Homeland Security, and Health and Human Services. 
At the same time, research project needs may require changes in 
relationships between the small business and its research 
institution partner. The Committee believes that the additional 
flexibility introduced by this legislation into the SBIR and 
STTR programs is much-needed.
    Section 107 of the bill specifically prohibits agencies 
from using Phase II invitations or any other screening process 
that would inhibit Phase I awardees from applying for a Phase 
II award in a competitive process open to all Phase I awardees. 
The Committee believes that this is an unfair practice which 
not only penalizes those companies that take the largest risk 
with unproven technologies and deprives such companies of the 
opportunity to take the lessons learned from Phase I into a 
Phase II effort, but also limits competition at Phase II. There 
is no provision in the current statute that specifies that 
there is a separate process between Phase I and Phase II, and 
this bill clarifies that it is Congress' intent that there not 
be anything to limit competition for Phase II awards.
    Section 108 of S. 3362 includes a compromise between 
Senators Kerry and Bond that would allow firms majority owned 
and controlled by multiple venture capital firms to participate 
in the SBIR program. The extent to which companies majority 
owned and controlled by multiple venture capital companies 
should be able to participate in SBIR was the foremost issue to 
reauthorizing the SBIR program. The venture capital issue stems 
from a 2002 decision by the SBA's Office of Hearings and 
Appeals that clarified that a business must have 500 or fewer 
employees, including affiliates, and be 51 percent owned and 
controlled by individuals to be eligible for the SBIR program 
and that venture capital companies are considered entities, not 
individuals, for the purposes of determining ownership. That 
clarification adversely affected some firms that had 
participated in the SBIR program, because they could no longer 
self-certify that they met the definition of a small business 
and, therefore, no longer could participate. Biotechnology 
firms that had participated in the SBIR program at NIH prior to 
the 2002 decision were most affected.
    During the 109th Congress, in July 2006, when the Committee 
marked up S. 3778, a comprehensive SBA reauthorization bill 
that included a title on reauthorization of the SBIR and STTR 
programs, the Committee adopted an amendment put forward from 
Senator Bond that would have allowed all qualifying agencies to 
direct up to 25 percent of their SBIR budgets to companies that 
are majority owned by multiple venture capital companies. 
Senator Bond introduced the amendment in part because he was 
concerned that the 2002 decision by SBA had become a roadblock 
for many small businesses, especially small biotech and life 
science companies, working to develop life saving cures, and 
that the decision was leading to a decline in the number of 
applications to the NIH SBIR program. Senator Bond spoke in 
support of the critical early stage research. Though there was 
no vote on the amendment in 2006, Senator Kerry spoke out 
against it, in part because he was concerned that directing up 
to 25 percent of SBIR funds to firms majority owned and 
controlled by venture capital firms, on top of the almost 22 
percent, in FY 2004, already going to firms with venture 
capital (but that are not majority owned) at NIH, would steer 
too many of the program's projects away from early-stage, high 
risk research that would not be done but for the government and 
instead towards projects with larger potential market shares 
and a greater potential to deliver better returns for investors 
in a shorter amount of time. Furthermore, the Administration 
opposed the majority owned venture capital provision in S. 
3778, as did other Senators, and this was one of several issues 
that attracted holds and prevented floor consideration. In 
order to have a better chance of getting an SBIR 
reauthorization bill through the Senate, it was necessary to 
moderate the provision. Senators Snowe, Lieberman, and Coleman 
played a role in reaching the compromise adopted as part of S. 
3362.
    Instead of allowing all 11 agencies to apply to direct up 
to 25 percent of their SBIR funds to firms majority owned and 
controlled by multiple venture capital firms, the agreement 
adopted as part of S. 3362 would allow NIH to apply to the SBA 
to award up to 18 percent of its SBIR dollars to companies 
majority owned and controlled by multiple venture capital 
companies. The remaining qualifying SBIR agencies would be able 
to apply to award up to 8 percent of their SBIR dollars to this 
class of firms. It is important to note that this is the 
percentage of dollars that would be allowed to be awarded to 
companies majority owned and controlled by venture capital 
companies (the companies that are currently ineligible). 
Companies that have some venture capital investment but that 
are still majority owned and controlled by individuals have 
always been eligible for SBIR dollars and will remain eligible 
to compete for the entirety of the SBIR allocation under this 
legislation.
    The Committee believes that this compromise is reasonable, 
addressing each side of the venture capital debate and paving 
the way for the Committee to act and the full Senate to pass 
this reauthorization legislation. For the small businesses that 
opposed changing the eligibility rules, this bill's compromise 
preserves more SBIR dollars for companies that are not majority 
owned and controlled by venture capital companies than the 2006 
amendment would have. Based on 2006 data, the most recent data 
available, it is estimated that this compromise would preserve 
an additional $69 million at NIH and $147 million at the other 
agencies, compared to the one adopted in 2006.\12\ It was 
particularly important to moderate these percentages because, 
unlike S. 3778, this legislation (SBIR/STTR Reauthorization Act 
of 2008) does not double the SBIR allocation (although it does 
increase the percentage of the allocation at all agencies 
except NIH), and the Committee needed to adjust the percentages 
to offset concerns that allowing these new entities to 
participate would crowd out small businesses. This may also be 
the case particularly for those in rural states where there is 
less venture capital investment and where GAO found little to 
no SBIR awards to firms with venture capital, further 
diminishing their participation in SBIR, the most important 
government research and development program available to small 
businesses. Specifically, GAO found that, in 17 largely rural 
states, none of the firms that had received SBIR awards from 
NIH had received venture capital investment, and, in 21 largely 
rural states, none of the firms that had received SBIR awards 
from DoD had received venture capital investment.\13\ It is 
also to the benefit of small businesses currently participating 
in the program that this bill maintains the affiliation rule, 
helping to keep current participants on a level playing field 
with the new class of companies that will be made eligible.
---------------------------------------------------------------------------
    \12\2006 SBIR Program Data, SBA Office of Technology, provided to 
the Committee on March 10, 2008.
    \13\``Small Business Innovation Research: Information on Awards 
Made by NIH and DoD in Fiscal Years 2001 through 2004,'' GAO 06-565, 
April 2006, p. 20.
---------------------------------------------------------------------------
    The Committee believes that this is also a positive 
compromise for the companies that have been supporting a change 
to the rules, because it provides companies majority owned and 
controlled by multiple venture capital firms with access to 
more SBIR dollars, proportionately and dollar-wise, than they 
were getting before the SBA clarified in 2002 that such firms 
were not eligible to participate in the program. For example, 
before the clarification, in 2001, GAO found that firms with 
venture capital received 14 percent, or $57 million, of all 
SBIR dollars at NIH, and, in 2002, they received 14 percent, or 
$72 million, of all SBIR NIH dollars.\14\ These dollars were 
shared between firms that were majority owned and controlled by 
multiple venture capital firms and those that were not. Based 
on 2006 SBIR data, the most recent available, this offer would 
make it possible for companies owned and controlled by multiple 
venture capital companies to get up to 18 percent, or $105 
million. These dollars would not be shared with companies with 
venture capital that are not majority owned and controlled by 
venture capital companies. If the full 18 percent is utilized, 
this could be a possible increase of 84 percent over the amount 
of funds firms with venture capital were sharing in 2001, and a 
possible increase of 45 percent over what they were sharing in 
2002.
---------------------------------------------------------------------------
    \14\GAO 06-565, p. 32.
---------------------------------------------------------------------------
    The same GAO study also looked at DoD, where it found that, 
in 2001, companies with venture capital received 5 percent, or 
$34 million, of all SBIR dollars and, in 2002, they received 7 
percent, or $48 million, of all SBIR dollars.\15\ Again, based 
on the most recent SBIR data available, this offer would make 
it possible for companies owned and controlled by multiple 
venture capital firms to get up to 8 percent, or $91 million, 
of DoD's SBIR dollars all to themselves. If the full 8 percent 
is utilized, this could be a possible increase of 65 percent 
over the amount of funds firms with venture capital were 
sharing in 2001, and a possible increase of 47 percent over the 
amount of funds they were sharing in 2002.
---------------------------------------------------------------------------
    \15\GAO 06-565, p. 32.
---------------------------------------------------------------------------
    As was the case with S. 3778, the affiliation rule itself 
and the 500 employee standard remain unchanged in this bill, 
meaning that all SBIR and STTR applicants, whether majority-
owned by venture capital companies or not, must still have 500 
or fewer employees, including the employees of their 
affiliates. In the case of companies majority owned and 
controlled by multiple venture capital companies, this means 
that the employees of venture capital companies that control or 
have the power to control the SBIR applicant, as well as the 
employees of portfolio firms of those venture capital companies 
that the venture capital companies control or have the power to 
control, will be added together and, in aggregate, must be 500 
or fewer.\16\ In testimony before Congress and in Statements of 
Administration Policy, the SBA has stressed the importance of 
the affiliation rule because it allows them to look into who is 
controlling the firm and the amount of resources that they 
bring to the table. Affiliation, as illustrated in the Federal 
Regulations, is determined by the ``totality of the 
circumstances'' and is the current regulatory tool to ensure 
that a small firm is not controlled by a large firm. The SBA is 
also concerned about the precedent that waiving the affiliation 
rule would set for other SBA programs. Furthermore, some small 
businesses have argued to the Committee that it would be unfair 
to exempt the employees of venture capital firms and the 
employees of their portfolio firms from the affiliation rule, 
allowing them to play by different rules, unless an alternative 
size standard is established, because it would create an unfair 
playing field, particularly in the biotech industry, where the 
majority of firms have fewer than 50 employees, significantly 
less than the current cap of 500 employees.\17\ Other small 
businesses, especially biotech firms, are concerned that SBA is 
applying affiliation inconsistently, making it difficult to 
determine eligibility and self-certify. In addition, they are 
concerned about the process in which SBA applies affiliation to 
an SBIR applicant's minority investors' other portfolio 
companies that they argue are unrelated to the SBIR applicant 
or their research, which, therefore, also creates an unfair 
playing field.\18\
---------------------------------------------------------------------------
    \16\13 CFR 121.103.
    \17\Critical Technology Assessment of Biotechnology in U.S. 
Industry (October 2003) U.S. Department of Commerce Technology 
Administration and Bureau of Industry and Security, http:
//www.technology.gov/reports/Biotechnology/CD120a_0310.pdf. And 
testimony before Congress from the Biotechnology Industry Organization 
on July 22, 2004; June 17, 2005; June 25, 2005; and July 27, 2005.
    \18\For further discussion of the affiliation issue, see the 
Committee Roundtable, ``Reauthorization of the Small Business 
Innovation Research Program: How to Address the Valley of Death, the 
Role of Venture Capital, and Data Rights,'' Transcript of Proceedings, 
October 18, 2007, p. 50-117.
---------------------------------------------------------------------------
    In addition, in order to address concerns from companies 
with venture capital that it is difficult to determine who 
their affiliates are and, therefore, whether they are, in fact, 
eligible to participate in the SBIR program, S. 3362 includes 
language to assist an SBIR applicant in interpreting the 
affiliation rule when self-certifying. Specifically, the bill 
directs the SBA to post a document on its website that helps 
SBIR applicants determine who is affiliated with them. Language 
is also in the bill that requires the SBA to update the 
relevant website information to keep it current and to respond 
in a timely way to requests from firms to determine if they are 
eligible.
    While the affiliation rule is an administrative issue, and, 
therefore, does not require legislation to make any changes, 
the report also includes data collection requirements on the 
participation of firms with venture capital, both majority and 
non-majority owned, to help the Committee collect necessary 
information to assess how the SBA's existing affiliation rule 
is affecting the participation of firms and whether 500 
employees, including those of affiliates, is a realistic limit. 
At the markup, Senator Cantwell expressed concern with the way 
in which the affiliation rule is currently being applied, and 
the data collection requirements will serve to build a base of 
information to guide future legislative or administrative 
changes.\19\
---------------------------------------------------------------------------
    \19\See transcript of the markup of S. 3362, the ``SBIR/STTR 
Reauthorization Act of 2008,'' July 30, 2008.
---------------------------------------------------------------------------
    On November 22, 2006, the Court of Appeals for the Federal 
Circuit ruled in favor of the U.S. Air Force dismissing Night 
Vision's breach of contract claim. The Committee believes that 
the Federal Court, in the case of Night Vision v. United 
States, disregarded the special acquisition preference intended 
by the Congress for Phase III awards by effectively placing 
upon the small businesses the burden of proof that a Phase III 
award would be practicable. The Committee believes that any 
questions with regard to the capacity of small business 
concerns to perform as Phase III awardees should be established 
by the relevant agency. Therefore, section 109 of the bill 
codifies and clarifies the existing special acquisition 
preference.
    Section 110 of the bill seeks to improve the collaboration 
of SBIR firms with federal labs. In 2002, the SBA proposed and 
subsequently implemented a requirement that SBIR firms seeking 
to subcontract with federal laboratories and research and 
development centers obtain a waiver from the SBA to enter into 
such subcontracts. Such subcontracts are typically concluded 
through cooperative research and development agreements 
(CRADAs). As a result, small firms which plan to utilize the 
world-class technical facilities or research capabilities of 
federal labs may be denied a waiver even after receiving their 
SBIR awards. The Committee believes that greater cooperation 
between small businesses and federal labs is a worthy goal, 
though agencies and departments cannot demand that a small 
business work with a federal lab in order to win the project. 
For that reason, the bill permits small businesses to 
subcontract portions of the work on SBIR and STTR awards to 
federal labs and research and development centers without 
having to seek a waiver from the SBA, as the SBA currently 
requires. Small businesses receiving SBIR and STTR awards where 
a portion of the work is subcontracted to federal labs and 
research and development centers shall not perform a smaller 
percentage of work than is required by the SBIR and the STTR 
Policy Directives. At the same time, the Committee acknowledges 
that the SBA waiver process was instituted in response to 
attempts by federal agencies to recapture SBIR funds through 
the CRADA subcontracting process regardless of scientific 
merit. Consequently, federal agencies shall not require small 
businesses to subcontract with federal labs and research and 
development centers as a condition of receiving SBIR or STTR 
awards, and the SBA shall ensure that no such requirements 
whatsoever are imposed. SBIR and STTR awards shall be based 
strictly on merit, and participation of federal labs and 
research and development centers in SBIR and STTR research 
shall be considered only to the extent that it strengthens the 
merits of the proposals.
    A provision authored by Senator Cardin clarifies that 
grantees who have entered into Cooperative Research and 
Development Agreements and are housed in NIH or other federal 
facilities can continue to receive CRADA grants and still 
retain or apply to the SBIR program. The practices of various 
national laboratory administrations have resulted in 
interpreting the rules differently. The effect has been to deny 
CRADA recipients the opportunity to keep or apply for SBIR 
funds. This amendment clarifies the language and permits 
contemporaneous participation in both the SBIR and CRADA 
programs.
    To promote effective enforcement of the SBIR and STTR 
Policy Directives, section 111 requires the SBA to notify 
Congress of its appeals or other actions to enforce the Policy 
Directives. Likewise, the Committee expects that the SBA 
Administrator will be promptly informed concerning any case or 
controversy surrounding the SBIR or the STTR program. The 
Committee believes that SBA must always be presented an 
opportunity to defend its programs in legal proceedings.

Title II

    In order to strengthen the technological competitiveness of 
small businesses in all fifty states and to improve 
participation rates in the SBIR and STTR programs from states 
all across the country, section 201 of S. 3362 reauthorizes the 
Federal and State Technology Partnership Program (FAST) and the 
Rural Outreach Program through 2014 and increases the amount of 
dollars allocated to the Rural Outreach Program from $2 million 
to $5 million per year. As part of the 2000 Reauthorization of 
the SBIR program, Congress created the Federal and State 
Technology Partnership Program. FAST was created to strengthen 
the technological competitiveness of small business concerns in 
all 50 states by providing competitive matching grants to 
states to help support the SBIR and STTR programs. These grants 
are traditionally used to raise awareness of SBIR and STTR, 
assist technology transfers by universities to small 
businesses, provide technical assistance to firms participating 
in the SBIR program, and encourage commercialization of 
technology developed through SBIR funding. The FAST program has 
proven vital to rural states, which have traditionally been in 
the lower tier of states in terms of SBIR/STTR awards and total 
dollars. For this reason, technical assistance provided under 
FAST grants is extremely important to rural small businesses 
and universities. In general, the more SBIR applications that 
are submitted by small businesses in a state, the more SBIR 
awards are made in that state.
    While rural states have utilized the FAST program 
successfully, the Administration has tried to eliminate it in 
its budget requests, and the Committee believes that rural 
areas need additional technical assistance to help their small 
businesses compete in the SBIR program and so has reauthorized 
and enhanced the program. Currently, each participating state 
that receives FAST awards is required to match each federal 
dollar that is provided with state funds. The Committee 
supports this approach, as each recipient should match funds 
considering that the federal government is putting up the 
majority of funds for these activities. As the program is 
currently structured, the 18 states receiving the fewest SBIR 
Phase I awards are required to put up 50 cents for each federal 
dollar. The lower tier of states requires additional technical 
assistance, so they should have a greater incentive to apply 
for these grants. Next, the 16 states receiving the greatest 
number of Phase I awards are required to match dollar for 
dollar each federal dollar awarded. States not included in 
either of these two categories, those in the middle tier, are 
required to match 75 cents for each federal dollar. There is 
also a special match requirement for low-income areas, which is 
50 cents for each federal dollar.
    In reviewing this current structure, the Committee believes 
that rural areas and rural small businesses could benefit from 
a reduced match requirement for the FAST program and adopted a 
provision from Senator Landrieu, taken from S. 3343, to do so. 
Just as low-income areas and states which are the bottom 18 
states for SBIR awards are provided a 50 cent match 
requirement, FAST award recipients in rural areas should be 
provided a reduced match requirement. The bill makes this 
important revision and would also further reduce the match 
requirement, to 35 cents, for FAST grants from rural areas 
which are also in the bottom 18 states. These changes would 
provide increased technical assistance and would provide 
assistance where it is most needed--our rural small business 
and universities. Furthermore, this change does not affect the 
allocation of SBIR program awards but does provide rural areas 
with a level playing field when competing for these awards.
    Section 201 also includes a provision to encourage the 
establishment of initiatives to reach out to traditionally 
underutilized communities with the goal of increasing their 
participation in the SBIR and STTR programs. This is one of the 
key recommendations of the 2007 comprehensive report on the 
SBIR program issued by the National Academy of Sciences, which 
found the following:
     Academics represent an important future pool of 
applicants, firm founders, principal investigators, and 
consultants. Recent research shows that owing to the low number 
of women in senior research positions in many leading academic 
science departments, few women have the chance to lead a 
spinout. According to Peter Rosa and Alison Dawson, 
``Underrepresentation of female academic staff in science 
research is the dominant (but not the only) factor to explain 
low entrepreneurial rates amongst female scientists.''\20\
---------------------------------------------------------------------------
    \20\Peter Rosa and Alison Dawson, ``Gender and the 
Commercialization of University Science: Academic Founders of Spinout 
Companies,'' Entrepreneurship & Regional Development, Volume 18, Issue 
4, July 2006, p. 341-366.
---------------------------------------------------------------------------
     Agencies do not have a uniformly positive record 
in collecting data and monitoring funding flows for research by 
women and minority-owned firms.
     While support for women-owned businesses is 
increasing, support for minority-owned firms has not increased. 
For example, the share of Phase I awards to minority-owned 
firms at DoD has declined quite substantially since the mid 
1990s and fell below ten percent for the first time in 2004 and 
2005. Data on Phase II awards suggest that the decline in Phase 
I award shares for minority-owned firms is reflected in Phase 
II.
    These findings by the NAS also led the Committee to 
establish additional reporting requirements on awards to women 
and minority-owned firms, discussed later in the report.
    Further, section 202 of the bill includes a provision from 
Senator Coleman, originally proposed as an amendment to S. 
3778, in the 109th Congress, which establishes a five-year 
workforce development grant pilot program to match up 
innovative small businesses with college students studying 
science, technology, engineering, and math. The proposal would 
provide SBIR grantees with a 10 percent bonus grant, for either 
Phase I or Phase II SBIR grants, with a total maximum award of 
$10,000 per year for small businesses that provide 
opportunities to these students.
    In order to provide SBIR awardees with a more appropriate 
amount of technical assistance, section 203 of the bill 
increases the amount of discretionary technical assistance that 
may be given by federal agencies from $4,000 per Phase I award 
to $5,000 and from $4,000 per year of a Phase II award to 
$5,000 per year. To make the law consistent, the bill states 
that this technical assistance shall be in addition to the SBIR 
award for both Phases I and II. To address concerns from small 
businesses that the technical assistance provider that they are 
required to use may not provide them with the type of technical 
assistance that would best suit their needs, the bill includes 
a provision allowing award recipients to seek out their own 
technical assistance provider and to receive the same amount as 
do those who use the agency's contracted provider. Finally, the 
bill clarifies that agencies may only pay the contractor for 
those recipients who utilize the services provided by the 
agency's technical assistance provider. Participants at the 
Committee's roundtable on August 1, 2007, had expressed 
concerns that federal agencies were bundling the technical 
assistance contracts and that technical assistance providers 
were being compensated for services that were not used.
    During the 108th Congress, Senator Snowe sponsored and 
Senator Kerry cosponsored S. Amdt. 2531, creating the SBIR 
Commercialization Pilot Program (CPP) at the Department of 
Defense, which incorporated relevant amendments offered by both 
Senators to S. 1042, the FY 2006 Defense Authorization bill. 
The CPP authorized incentives for prime contractors and 
provided assistance to SBIR firms in order to facilitate Phase 
III awards at the prime contract and the subcontract level. 
Examples of appropriate incentives are provided in the May 17, 
2006, guidance letter from Senators Snowe and Kerry and 
Congressman Donald Manzullo (at the time Chairman of the House 
Committee on Small Business) to the Undersecretary of Defense 
Kenneth Krieg and in the White Paper of the Small Business 
Technology Council, Incentives and Technology Transition: 
Improving Commercialization of SBIR Technologies in Major 
Defense Acquisition Program (Robert-Allen Baker, May 2006). The 
Committee believes that CPP is a valuable mechanism to move 
technologies across the ``valley of death,'' and section 204 of 
this bill strengthens CPP at the Department of Defense and 
reauthorizes the program through 2014.
    The bill also includes a provision in section 205 that 
permits civilian SBIR agencies to establish their own 
commercialization pilot programs and authorizes these pilot 
programs through 2014. In response to questions during a 
Committee hearing on July 12, 2006, Dr. Charles Wessner of the 
National Academies testified that efforts to promote greater 
funding of Phase II technologies would be valuable, and the 
Committee has included these pilot programs for that purpose. 
The goal of the commercialization pilot programs is to help 
move existing Phase II technologies across the ``valley of 
death'' and closer to the commercial marketplace. Federal 
agencies would be permitted to use up to 10 percent of their 
SBIR and STTR dollars to make awards under a commercialization 
pilot program, and awards made under these pilot programs would 
be allowed to exceed the cap on award size, up to two times the 
award cap, or $2 million per award. To address concerns that 
these awards would cut into the SBIR allocation and to further 
facilitate the strategic connections that will allow for SBIR 
and STTR technologies to be transitioned into a government 
system or to be commercialized, awards given under these pilot 
programs would need to be matched by private or federal non-
SBIR, non-STTR dollars.
    Recognizing that nanotechnology has the potential to 
revolutionize our way of life and to make a significant 
contribution to our economy moving forward, section 206 of the 
bill encourages the submission of applications for support of 
nanotechnology-related projects. This provision comes from S. 
3274, ``National Nanotechnology Initiative Amendments Act of 
2008,'' sponsored by Senator Kerry and cosponsored by Senator 
Snowe. Nanotechnology involves the understanding and control of 
matter at scales between 1 and 100 nanometers and includes 
nanoscale science, technology, and engineering. In the eight 
years since the creation of the National Nanotechnology 
Initiative, it has become clear that our ability to manipulate, 
engineer, and manufacture nanoparticles provides unlimited 
potential for innovation and growth throughout our economy. For 
instance, an estimated $50 billion in products worldwide 
incorporated nanotechnology in 2006, and that figure has been 
projected by some to reach $2.6 trillion over the next eight 
years. From technologies to improve the capabilities of our 
military to life-changing medical devices, nanotechnology has 
demonstrated its unique ability to break barriers and to expand 
the realm of what is possible. The Committee believes that it 
is important for the federal government to encourage the 
development of nanotechnology-related projects and that the 
SBIR and STTR programs are suitable mechanisms for furthering 
progress toward this goal. This provision sunsets after five 
years, because the Committee believes that emphasis on certain 
sectors should not exist in perpetuity but, rather, should be 
updated to be relevant to current needs and challenges.
    The bill also includes a pilot program, in section 207, 
designed by Senator Lieberman, taken from S. 2988, to improve 
the operations of the SBIR program at NIH. Each year, patients 
are diagnosed with an increasing number of orphan diseases. 
Many of these diseases lack an appropriate treatment. The need 
for effective and affordable treatments, vaccines, or cures for 
these diseases is growing. According to the findings of the 
National Academy of Sciences' 2007 report, the SBIR program at 
NIH could be enhanced through the following means: 
establishment of a centralized advisory body that makes 
recommendations based on comprehensive metrics, further 
development of the program's ability to capture this data, 
enhanced flexibility in terms of addressing scientific 
translation and product development, and a reduction of the 
time between Phase I and Phase II awards.
    Pursuant to these recommendations, this section establishes 
an advisory board at the NAS to improve the utilization of data 
in decision-making. The board will be comprised of the NIH 
Director, the Director of the NIH SBIR program, relevant senior 
NIH managers, and subject matter experts. In addition, to bring 
business development experience to the board, one-half of the 
members will be prior SBIR grantees. The principal purpose of 
the board is to collect the relevant metrics to determine the 
effect of various SBIR program initiatives on 
commercialization. The board will also review a new requirement 
of the SBIR program at NIH. Program managers, when awarding 
grants and contracts, will emphasize applications that from the 
onset, identify putative products and services that may enhance 
the development of cures and therapies.
    Additionally, this section strengthens data-capture to 
ensure that decisions aimed at encouraging the translation of 
basic science to marketed treatments are evidence-based. An 
emphasis is placed on collecting the metrics identified in the 
National Academy of Sciences' 2007 review of the SBIR program 
at NIH.
    The NAS recommended further enhancing the flexibility of 
the NIH's SBIR program and this section seeks to provide the 
SBIR program at NIH with that opportunity. Prior to adoption of 
new procedures, it is important to test ideas on a smaller 
scale. This section permits one percent of SBIR's budget at NIH 
to be utilized to establish pilot programs in order to 
investigate new approaches to enhancing the development of 
novel products for disease treatments. The pilot programs may 
be designed to establish inventive new strategies or a program 
may focus on program management initiatives. These may include: 
adding successful SBIR grantees during the review process, 
hiring experienced business development personnel to staff 
positions to bolster the programs' subject-matter expertise, 
separating the scientific and commercial review process, and 
assessing the efficacy of awarding larger grants on the overall 
success of product development. The NIH director will be 
required to submit a report to Congress and the NAS advisory 
board reviewing these programs.
    Last, the provisions adopted from Senator Lieberman will 
encourage the director of the SBIR program at NIH to reduce the 
time period between Phase I and Phase II grants to six months, 
to the greatest extent possible. This section will sunset five 
years after enactment.

Title III

    In order to address continued concerns that the SBIR and 
STTR programs are insufficiently data-driven and to provide 
Congress with a better base of information to use when 
considering future policy changes to the programs, the bill 
includes many oversight and evaluation provisions, encompassing 
sections 301 through 309. The data collection and reporting 
requirements focus, in particular, on the effect of the change 
made in the bill to allow firms majority owned and controlled 
by multiple venture capital companies to participate in the 
SBIR program, on the involvement of women, minorities, and 
people from rural areas in the programs, and on collaboration 
between small businesses participating in the programs and 
universities. To ensure that this information is collected, 
synthesized, and used to improve the progress toward the 
programs' goals, the bill requires the agencies to maintain 
databases and requires the SBA to coordinate the databases so 
that the information is centralized and easily accessible. 
Section 307 of the bill extends the NAS' review of the SBIR 
program and requires NAS to make recommendations on the program 
every four years.
    In order to address concerns that federal agencies are 
inaccurately calculating their extramural research and 
development budgets, from which the SBIR and STTR allocations 
are determined, section 306 of the bill directs the GAO to 
conduct periodic fiscal and management audits of the program to 
verify that agencies are meeting the allocation requirements of 
the SBIR and STTR programs. The Committee also directs the GAO 
to make a recommendation as to whether or not it would be more 
effective for the SBIR and STTR allocations to be determined 
based on the entirety of federal agencies' research and 
development budgets, internal and external.
    The federal government spends over $50 billion a year in 
research and development contracts and billions more on 
contracts for goods and services which utilize innovative 
technologies. As a result, federal procurement spending can act 
as a strong force in stimulating small business innovation. 
Public authorities and officials in the European Union, the 
United Kingdom, Sweden, and other countries have proposed a 
three percent pro-innovation set-aside for their small and 
medium enterprises (SMEs). To retain global competitive 
leadership, the Committee believes that the United States 
should consider adopting its own pro-innovation technology 
insertion goal for Phase III SBIR and STTR awards in all 
federal contracts for research, development, testing, and 
evaluation. This bill does not set such a goal, since there is 
currently no data from which to determine what a reasonable 
goal would be, but section 308 does establish reporting 
requirements on federal agencies that issue Phase III contracts 
in order to collect information to establish a baseline.
    Section 309 of the bill addresses concerns that relevant 
SBIR and STTR intellectual property protections are not being 
properly enforced. To attract small businesses for 
participation in federal research and development, the SBIR and 
the STTR programs guarantee data rights protections to small 
business innovators. Unfortunately, the scope of these 
protections has been misconstrued by the U.S. Court of Federal 
Claims in the case of Night Vision v. United States. The Court 
mistakenly relied on the Federal Acquisition Regulation to 
exclude prototypes from statutory data rights protections, even 
though the Small Business Act clearly and unambiguously 
provides that prototypes are within the scope of research and 
development activities which are part of SBIR and STTR. 
However, because the Committee is concerned that there is a 
lack of information on the extent of these violations that 
would serve to justify policy changes, this bill requires the 
GAO to conduct a study of the programs to determine if federal 
agencies are adhering to the data rights protections of SBIR 
awardees and if any clarification of law or policy directives 
is necessary.

Title IV

    Finally, section 401 of the bill requires the SBA to amend 
the SBIR and STTR Policy Directives to conform to the 
directives of the bill and to publish the policy directives, as 
amended, in the Federal Register.

                           V. Committee Vote

    In compliance with rule XXVI(7)(b) of the Standing Rules of 
the Senate, the following votes were recorded on July 30, 2008.
    A motion by the Chair to adopt the ``SBIR/STTR 
Reauthorization Act of 2008,'' to reauthorize the SBIR and STTR 
programs, and for other purposes, was approved by a unanimous 
19-0 recorded vote with the following Senators voting in the 
affirmative: Kerry, Levin, Harkin, Lieberman, Landrieu, 
Cantwell, Bayh, Pryor, Cardin, Tester, Snowe, Bond, Coleman, 
Vitter, Dole, Thune, Corker, Enzi, and Isakson.

                           VI. Cost Estimate

    In compliance with rule XXVI(11)(a)(1) of the Standing 
Rules of the Senate, the Committee estimates the cost of the 
legislation will be equal to the amounts discussed in the 
following letter from the Congressional Budget Office.

                                                   August 19, 2008.
Hon. John F. Kerry,
Chairman, Committee on Small Business and Entrepreneurship,
U.S. Senate, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for S. 3362, the SBIR/STTR 
Reauthorization Act of 2008.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Susan Willie.
            Sincerely,
                                                   Peter R. Orszag.
    Enclosure.

S. 3362--SBIR/STTR Reauthorization Act of 2008

    Summary: S. 3362 would extend and expand programs that 
require certain agencies to set aside portions of their 
research and development budgets for small businesses. The bill 
also would authorize appropriations to increase the number of 
small businesses participating in those programs. Finally, the 
bill would require participating agencies to develop new 
databases for program evaluation and business development and 
authorize several studies of the programs by the Government 
Accountability Office (GAO) and the National Academies of 
Science (NAS).
    Based on information from the Small Business Administration 
(SBA) and other agencies, CBO estimates that implementing S. 
3362 would cost $217 million over the 2009-2013 period, subject 
to appropriation of the necessary amounts. Enacting the bill 
would not affect direct spending or revenues.
    S. 3362 contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act (UMRA) 
and would impose no costs on state, local, or tribal 
governments.
    Estimated cost to the Federal Government: The estimated 
budgetary impact of S. 3362 is shown in the following table. 
The costs of this legislation fall within budget functions 050 
(national defense), 250 (general science, space, and 
technology), 270 (energy), 300 (natural resources and 
environment), 350 (agriculture), 370 (commerce and housing 
credit), 400 (transportation), 500 (education, training, 
employment, and social services), 550 (health), and 750 
(administration of justice).

----------------------------------------------------------------------------------------------------------------
                                                                      By fiscal year, in millions of dollars--
                                                                   ---------------------------------------------
                                                                     2009   2010   2011   2012   2013  2009-2013
----------------------------------------------------------------------------------------------------------------
                                  CHANGES IN SPENDING SUBJECT TO APPROPRIATION

Reauthorize SBIR/STTR Programs:
    Estimated Authorization Level.................................     27     33     34     34     35       163
    Estimated Outlays.............................................     21     31     34     34     35       155
Increase in R&D Budget Set-asides:
    Estimated Authorization Level.................................      0      2      3      4      5        14
    Estimated Outlays.............................................      0      1      2      4      5        12
FAST Program Reauthorization:
    Authorization Level...........................................     10     10     10     10     10        50
    Estimated Outlays.............................................      2      5      9     10     10        36
SBIR-STEM Workforce Development Program:
    Authorization Level...........................................      0      1      1      1      1         4
    Estimated Outlays.............................................      0      0      1      1      1         3
National Academy of Sciences Study:
    Estimated Authorization Level.................................      4      0      0      0      0         4
    Estimated Outlays.............................................      1      1      1      1      0         4
Additional Agency Activities:
    Estimated Authorization level.................................      7      0      0      0      0         7
    Estimated Outlays.............................................      3      4      0      0      0         7
Total Changes:
        Estimated Authorization Level.............................     48     46     48     49     51       242
        Estimated Outlays.........................................     27     42     47     50     51      217
----------------------------------------------------------------------------------------------------------------
Note.--SBIR = Small Business Innovation Research; STTR = Small Business Technology Transfer; FAST = Federal and
  State Technology Partnership; STEM = Science, Technology, Engineering, and Math.

    Basis of estimate: Under current law, the Small Business 
Innovation Research (SBIR) program requires federal agencies 
with extramural budgets for research and development (R&D) that 
exceed $100 million per year to set aside 2.5 percent of that 
budget for contracts with small businesses. (Extramural 
expenditures are expenditures for activities not performed by 
agency employees.) Likewise, the Small Business Technology 
Transfer (STTR) program requires federal agencies with 
extramural budgets for R&D that exceed $1 billion per year to 
set aside 0.3 percent of that budget for cooperative research 
between small businesses and a federal laboratory or nonprofit 
research institution. SBA is authorized to coordinate and 
monitor activities under both programs. Eleven agencies 
currently participate in one or both programs, including the 
Department of Defense, the Department of Health and Human 
Services, the Department of Energy, the Department of 
Agriculture, the National Aeronautics and Space Administration, 
the National Science Foundation, and the Environmental 
Protection Agency.
    The cost of those programs to the participating agencies 
consists primarily of personnel and associated overhead costs 
to solicit applications, prepare reports, and track outcomes. 
The organizational structures of such program offices vary. 
Some agencies have full-time staff members devoted to the SBIR 
and STTR programs, with other staff assisting as part of their 
duties; some have employees working part-time on the program.
    Based on information from SBA and participating agencies, 
CBO estimates that implementing S. 3362 would cost $217 million 
over the 2009-2013 period, assuming appropriation of the 
necessary amounts.

Reauthorization of the SBIR and STTR programs

    The bill would extend the SBIR program through 2022 and the 
STTR program through 2023. Under current law, the SBIR program 
is scheduled to terminate at the end of fiscal year 2008, and 
the STTR program is scheduled to terminate at the end of fiscal 
year 2009. Based on information from SBA and participating 
agencies, CBO estimates that administering the two programs 
will cost about $30 million in 2008 (about $2 million of that 
amount will be for SBA). CBO estimates that reauthorizing the 
SBIR program would cost $21 million in 2009. Extending the SBIR 
program and the STTR program would cost $155 million over the 
2009-2013 period, assuming appropriation of the necessary 
amounts. (Continuation of the two programs would cost an 
additional $35 million to $40 million a year after 2013.)

Increase in R&D budget set-asides for small businesses

    S. 3362 also would increase the amount of each agency's R&D 
budget to be set aside for the programs starting in fiscal year 
2010. For SBIR, the set-aside would increase by 0.1 percent 
each year over the 2010-2019 period, ending at 3.5 percent of 
each participating agency's R&D budget. For STTR, the set-aside 
would increase by 0.1 percent every two years over the 2010-
2014 period, ending at 0.6 percent of each participating 
agency's budget. Based on information from SBA and the 
agencies, CBO expects that the expansion would lead to an 
increase in the number of applications received under both 
programs by more than a third over the 2009-2013 period. 
Assuming appropriation of the necessary amounts, CBO estimates 
that processing the additional applications would cost $12 
million over the 2009-2013 period.

FAST program reauthorization

    S. 3362 would reauthorize the Federal and State Technology 
(FAST) Partnership program to improve the competitiveness of 
small businesses in technological fields. A portion of the 
funds made available under the program would also be available 
to conduct outreach and provide technical assistance to 
increase the number of small businesses participating in the 
SBIR program. The bill would authorize the appropriation of $10 
million for each of fiscal years 2009 through 2014 to implement 
the program. Based on historical spending patterns of SBA's 
other business assistance programs, CBO estimates that 
implementing this provision would cost $36 million over the 
2009-2013 period, assuming appropriation of the specified 
amounts. (An additional $24 million would be spent after 2013.)

SBIR-STEM Workforce Development Program

    The bill would establish a program to encourage small 
businesses that participate in the SBIR program to provide 
internships to college students who are pursuing studies in the 
fields of science, technology, engineering, and math. 
Participating businesses would be eligible for a bonus grant 
equal to 10 percent of their SBIR award, up to a maximum of 
$10,000 per year. S. 3362 would authorize the appropriation of 
$1 million per year in fiscal years 2010 through 2014 for this 
program. CBO estimates that implementing this provision would 
cost $3 million over the 2009-2013 period, assuming 
appropriation of the necessary amounts.

National Academy of Sciences Study

    The bill would direct certain agencies participating in the 
SBIR program to enter into an agreement with the National 
Academy of Sciences (NAS) for the National Research Council to 
study how the SBIR program has stimulated innovation and used 
small businesses to meet federal research and development 
needs. Based on the results of the study, NAS also would 
develop recommendations for improving the SBIR program. Based 
on information from NAS, CBO estimates that conducting a study 
as required by S. 3362 would cost $4 million over the 2009-2013 
period.

Additional agency activities

    S. 3362 would require each agency participating in the SBIR 
or STTR program to develop a data system to collect and 
maintain information from applicants and businesses that 
receive awards under either program to assess the performance 
of the program. Information maintained in those systems would 
serve as a source for a public and a government database 
maintained by SBA to evaluate the performance of the SBIR and 
STTR programs. Based on information from the agencies, CBO 
estimates that developing new databases for each participating 
agency would cost about $6 million over the 2009-2013 period.
    The bill also would require GAO to conduct two studies: One 
to determine whether the agencies participating in the SBIR and 
STTR programs are complying with the programs' requirements to 
allocate a specific portion of their R&D budgets, the other to 
assess whether agencies participating in the SBIR program are 
sufficiently protecting the intellectual property rights of the 
small businesses that receive awards under the program. CBO 
estimates that conducting such studies would cost about $1 
million, subject to the availability of appropriated funds.
    Intergovernmental and private-sector impact: S. 3362 
contains no intergovernmental or private-sector mandates as 
defined in UMRA and would impose no costs on state, local, or 
tribal governments.
    Previous CBO estimate: On April 22, 2008, CBO transmitted a 
cost estimate for H.R. 5819, the SBIR/STTR Reauthorization Act, 
as reported by the House Committee on Small Business on April 
18, 2008. The Senate legislation has several differences from 
the House legislation: It would reauthorize and expand the SBIR 
and STTR programs over a longer period of time; it would 
reauthorize the FAST program for six years rather than two as 
provided in H.R. 5819; and it would authorize several new 
studies. H.R. 5819, however, contains an authorization of 
appropriations for a commercialization program that is not 
included in S. 3362. CBO estimated that implementing the 
provisions of H.R. 5819 would cost $263 million over the 2009-
2013 period.
    Estimate prepared by: Federal Costs: Susan Willie. Impact 
on State, Local, and Tribal Governments: Elizabeth Cove. Impact 
on the Private Sector: Jacob Kuipers.
    Estimate approved by: Peter H. Fontaine, Assistant Director 
for Budget Analysis.

                  VII. Evaluation of Regulatory Impact

    In compliance with rule XXVI(11)(b) of the Standing Rules 
of the Senate, it is the opinion of the Committee that no 
significant additional regulatory impact will be incurred in 
carrying out the provisions of this legislation. There will be 
no additional impact on the personal privacy of companies or 
individuals who utilize the services provided.

                   VIII. Section-by-Section Analysis


Sec. 1. Short title

    This section specifies the short title of the legislation 
as the ``SBIR/STTR Reauthorization Act of 2008.''

Sec. 2. Table of contents

    This section provides the table of contents for the 
legislation.

Sec. 3. Definitions

    This section re-states applicable definitions from the 
Small Business Act.

         TITLE I--REAUTHORIZATION OF THE SBIR AND STTR PROGRAMS

Sec. 101. Extension of termination dates

    This section extends the SBIR and STTR programs for 14 
years, making the new sunset dates for the SBIR and STTR 
programs September 30, 2022, and September 20, 2023, 
respectively.

Sec. 102. Status of the SBA Office of Technology

    This section requires the SBA to maintain an Office of 
Technology headed by an Assistant Administrator who will report 
directly to the Administrator. It also requires that the Office 
of Technology be independent from the Office of Government 
Contracting and that it be sufficiently staffed and funded to 
oversee the SBIR and STTR programs and to comply with statutory 
data collection, evaluation, and reporting requirements.

Sec. 103. SBIR cap increase

    This section increases the SBIR allocation from 2.5 percent 
to 3.5 percent by increasing it 0.1 percent each year from 
fiscal year 2010 through 2019. The provision also requires the 
Department of Defense and the Department of Energy to direct 
these additional funds to further the technology readiness 
levels of SBIR projects, including conducting testing and 
evaluation, and not to be used for Phase I and Phase II awards. 
The section does not apply to the Department of Health and 
Human Services.

Sec. 104. STTR cap increase

    This section increases the STTR allocation from 0.3 percent 
to 0.6 percent by increasing it by 0.1 percent every two years 
from fiscal year 2010 through 2014.

Sec. 105. SBIR and STTR award levels

    This section increases the size of SBIR and STTR awards 
from $100,000 to $150,000 for Phase I and from $750,000 to $1 
million for Phase II and requires the SBA to make triennial 
adjustments of the award sizes for inflation. The provision 
prohibits any agency from issuing an SBIR or STTR award if the 
size of the award exceeds the award guidelines established in 
this section by more than 50 percent. Finally, the provision 
requires federal agencies to maintain information on awards 
exceeding the award guidelines, including the award amount, a 
justification for exceeding the guidelines, the identity and 
location of the recipient, and whether or not the recipient 
firm has received venture capital investment and, if so, 
whether or not it is majority owned and controlled by multiple 
venture capital companies.

Sec. 106. Agency and program collaboration

    The section allows SBIR and STTR applicants to receive 
awards for subsequent SBIR or STTR phases at another agency and 
also allows small business concerns which received SBIR or STTR 
awards to receive awards for subsequent phases in either the 
STTR or SBIR program, respectively.

Sec. 107. Elimination of Phase II invitations

    This section requires that federal agencies conduct their 
solicitation of Phase II SBIR and STTR proposals without any 
invitation, pre-screening, pre-selection, or down-selection 
process between the first and second phase.

Sec. 108. Majority-venture investments in SBIR firms

    This section allows the Department of Health and Human 
Services to apply for the authority to permit firms majority 
owned and controlled by multiple venture capital companies to 
compete for up to 18 percent of the agency's SBIR funds. All 
other qualifying federal agencies with an SBIR program may 
apply for the authority to permit firms majority owned and 
controlled by multiple venture capital companies to compete for 
up to eight percent of the agency's SBIR funds. The provision 
also requires the Administrator of the SBA to post and maintain 
a website providing a clear explanation of the SBIR program 
affiliation standards.

Sec. 109. SBIR and STTR special acquisition preference

    This section codifies the language from the SBIR and STTR 
Policy Directives confirming the intent of Congress to 
establish a special acquisition preference for SBIR and STTR 
Phase III awards. The provision clarifies that preference for 
contracts concerning research developed with SBIR or STTR funds 
should go to the developers and holders of SBIR and STTR 
technologies to the greatest extent practicable.

Sec. 110. Collaborating with Federal laboratories and research and 
        development centers

    This section reduces the burden on cooperation between 
SBIR/STTR firms and federal laboratories by ensuring that such 
subcontracting is generally permitted without the requirement 
for a waiver. The provision also ensures that subcontracting to 
federal laboratories is not required of SBIR or STTR awardees. 
Finally, it clarifies that firms that have entered into a 
cooperative agreement with a federal laboratory are eligible to 
receive SBIR/STTR awards.

Sec. 111. Notice requirement

    This section ensures that the SBA is notified any time the 
SBIR or STTR policy directives are challenged in court. It also 
requires the SBA to report to Congress on actions taken to 
enforce the SBIR and STTR policy directives.

          TITLE II--OUTREACH AND COMMERCIALIZATION INITIATIVES

Sec. 201. Rural and state outreach

    This provision reauthorizes the FAST program and the ROP 
through 2014, and increases the authorization for the ROP from 
$2 million to $5 million. The provision also includes language 
to encourage the establishment of initiatives to reach out to 
traditionally underutilized communities with the goal of 
increasing their participation in the SBIR and STTR programs.
    This section also reduces the match requirement for FAST 
recipients in rural areas to 50 cents for each federal dollar. 
The provision also reduces the match requirement to 35 cents 
for a FAST recipient in a rural area which is also located in 
one of the 18 states receiving the fewest SBIR Phase I awards.

Sec. 202. SBIR-STEM Workforce Development Grant Pilot Program

    This section establishes a five-year workforce development 
grant pilot program to match up innovative small businesses 
with college students studying science, technology, 
engineering, and math. The proposal would provide SBIR grantees 
with a 10 percent bonus grant, for either Phase I or Phase II 
SBIR grants, with a total maximum award of $10,000 per year for 
small businesses that provide opportunities to these students.

Sec. 203. Technical assistance for awardees

    This section increases the amount of discretionary 
technical assistance that SBIR and STTR agencies can contract 
out to provide to awardees from $4,000 to $5,000 for Phase I 
awards and from $4,000 to $5,000 per year for Phase II awards. 
The provision also states that this amount shall be in addition 
to the amount of the recipient's award. It also requires 
agencies to provide SBIR and STTR award winners who wish to 
procure their own technical assistance with the allowable 
amount. Finally, the provision prohibits the agencies from 
using these funds to pay its contractor for technical 
assistance for a given SBIR or STTR award unless the contractor 
provides the technical assistance to that awardee.

Sec. 204. Commercialization Pilot Program: Department of Defense

    This section extends reauthorizes the Commercialization 
Pilot Program (CPP) at the Department of Defense through 2014 
and extends it to the department's STTR program. The provision 
authorizes the Secretary of Defense to establish goals for 
transitioning Phase I and Phase II technologies in 
subcontracting plans for contracts of $100 million or more. The 
provision also requires the Secretary of Defense to set a goal 
to increase the number of Phase II contracts that lead to 
technology transition into programs of record or fielded 
systems and to use incentives to encourage agency program 
managers and prime contractors to meet that goal. Finally, the 
provision includes reporting requirements on the status of 
projects funded through CPP.

Sec. 205. Commercialization pilot programs for civilian agencies

    This section authorizes agencies other than the Department 
of Defense to create Innovation Development Transition Pilot 
Programs to support advanced development of small business 
technologies which are facing high manufacturing or regulatory 
costs. The provision authorizes these agencies to grant Phase 
II awards up to two times the regular size (up to $2 million). 
As a condition of awards, matching private or federal non-SBIR 
funds are required.

Sec. 206. Nanotechnology initiative

    This section requires each agency with an SBIR or STTR 
program to encourage the submission of applications for support 
of nanotechnology related projects. The section sunsets in 
2014.

Sec. 207. Accelerating cures

    This section establishes an advisory board at the National 
Academy of Sciences consisting of the Directors of the NIH and 
its SBIR program, senior agency managers at the NIH, industry 
experts, and other program stakeholders to provide regular 
assessments of program management and effectiveness. Half of 
the board shall be SBIR awardees. This section also encourages 
the creation of a pilot program, not to exceed 1 percent of 
SBIR dollars at NIH, to support innovation in program 
management and to enhance the development of cures and 
treatments. It also encourages NIH to reduce the time period 
between Phase I and Phase II to no more than six months to the 
greatest extent practicable. Finally, the section requires the 
NIH director to submit an annual report to Congress and the 
aforementioned NAS advisory board on the activities of the SBIR 
program at the NIH. Five years after enactment this section 
will sunset.

                  TITLE III--OVERSIGHT AND EVALUATION

Sec. 301. Streamlining annual evaluation requirements

    This section requires the Administration to report to 
Congress at least annually the number of proposals received 
from firms with venture capital investment, including those 
owned and controlled by multiple venture capital firms. It also 
requires the Administration to report on efforts to increase 
outreach to firms owned and controlled by women and minorities, 
the implementation and compliance with the allocation of funds 
for firms majority owned and controlled by multiple venture 
capital companies, and appeals of Phase III awards and notices 
of noncompliance with the SBIR and the STTR Policy Directives. 
Finally, the section requires the Administration to coordinate 
the implementation of electronic databases at the participating 
agencies.

Sec. 302. Data collection from agencies for SBIR

    This section requires agencies with an SBIR program to 
collect data on whether or not an applicant or awardee has 
venture capital, if it is majority owned and controlled by 
multiple venture capital firms, the amount of venture capital 
it has received at the time of award, if it has foreign 
investors and who they are, if it is owned by a woman, if it is 
owned by a minority, if it received assistance from the FAST 
program or the ROP, and if it has a university affiliation. The 
provision also requires agencies to justify awards given that 
exceed the statuary guidelines.

Sec. 303. Data collection from agencies for STTR

    This section requires agencies with an STTR program to 
collect data on whether or not an applicant or awardee has 
venture capital, if it is majority owned and controlled by 
multiple venture capital firms, the amount of venture capital 
it has received at the time of award, if it has foreign 
investors and who they are, if it is owned by a woman, if it is 
owned by a minority, if it received assistance from the FAST 
program or the ROP, and if it has a university affiliation. The 
provision also requires agencies to justify awards given that 
exceed the statutory guidelines.

Sec. 304. Public database

    This section requires that the public database maintained 
by the Administrator include information on whether or not a 
firm receiving an award has venture capital, is majority owned 
and controlled by multiple venture capital companies, is owned 
by a woman, is owned by a minority, has received assistance 
from the FAST program or the ROP, or has a university 
affiliation.

Sec. 305. Government database

    This section requires that the government database 
maintained by the Administrator in coordination with the 
agencies for the purposes of evaluation of the SBIR and STTR 
programs include information on the ownership structure and 
affiliations of awardee firms that have venture capital and 
that are majority owned and controlled by multiple venture 
capital companies, whether or not a firm is owned by a woman, 
is owned by a minority, has received assistance from the FAST 
program or the ROP, or has a university affiliation.

Sec. 306. Accuracy in funding base calculations

    This section requires the GAO to conduct an audit of the 
SBIR and STTR programs to determine whether federal agencies 
are complying with the allocation requirements. The provision 
also requires that the GAO assess whether or not it would be a 
more effective to base participation on a percentage of an 
agency's research and development budget rather than the 
extramural research and development budget and to report such 
information to Congress.

Sec. 307. Continued evaluation by the National Academy of Sciences

    This section authorizes the National Academy of Sciences to 
continue its evaluation of the SBIR program through the end of 
fiscal year 2021 and requires that updates of the studies be 
provided to Congress every four years from the date of 
enactment.

Sec. 308. Technology insertion reporting requirements

    This section requires the Administration to include in its 
annual report to Congress information on Phase III awards 
issued by SBIR and STTR agencies, including the dollar amount 
of these awards, their recipients, and the name of component or 
agency issuing them.

Sec. 309. Intellectual property protections

    This section requires the GAO to conduct a study of the 
SBIR and STTR programs to assess whether the agencies are 
adhering to the data rights protections for SBIR and STTR 
awardees and their technologies, as well as whether the current 
laws and policy directives are sufficient to protect the rights 
of the awardees. The report is due to Congress 18 months after 
the enactment of the Act.

                      TITLE IV--POLICY DIRECTIVES

Sec. 401. Conforming amendments to the SBIR and the STTR Policy 
        Directives

    This section requires conforming amendments to the SBA SBIR 
and STTR Policy Directives within 180 days to implement the 
provisions of this Act. It also requires that the 
Administration publish the SBIR and STTR Policy Directives in 
the Code of Federal Regulations.

                                  
