[Federal Register Volume 68, Number 107 (Wednesday, June 4, 2003)]
[Proposed Rules]
[Pages 33412-33416]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-14036]


=======================================================================
-----------------------------------------------------------------------

SMALL BUSINESS ADMINISTRATION

13 CFR Part 121

RIN: 3245-AE76


Small Business Size Regulations; Small Business Innovation 
Research Program

AGENCY: Small Business Administration (SBA).

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: The U.S. Small Business Administration (SBA) proposes to 
revise its small business size regulations to allow a small business 
that is owned and controlled by another business concern to be eligible 
for funding agreements under the SBA's Small Business Innovation 
Research (SBIR) Program. The proposed rule does not change the size 
standard requiring that an eligible small business concern, with its 
affiliates, have no more than 500 employees. The rule proposes to 
modify the small business eligibility requirements so that the SBIR 
awardee must meet one of the two following additional criteria: It must 
be a for-profit business concern that is at least 51% owned and 
controlled by one or more individuals who are citizens of, or permanent 
resident aliens in, the United States (as the regulations currently 
requires); or it must be a for-profit business concern that is 100% 
owned and controlled by another for-profit business concern that is 
itself at least 51% owned and controlled by one or more individuals who 
are citizens of, or permanent resident aliens in, the United States.

DATES: Comments must be received on or before July 7, 2003. Upon 
request, the SBA will make all public comments available.

ADDRESSES: Address written comments to Gary M. Jackson, Assistant 
Administrator for Size Standards, Office of Size Standards, 409 Third 
Street, SW., Washington, DC 20416. You may submit comments via email to 
[email protected], or via facsimile at (202) 205-6390. You may also 
submit comments electronically to http://www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: Carl Jordan, Office of Size Standards, 
at (202) 205-6618, or Maurice Swinton, Assistant Administrator for 
Technology, at (202) 401-6365. You may also email questions to 
[email protected].

SUPPLEMENTARY INFORMATION:

Introduction

    The Small Business Innovation Development Act of 1982 (SBIDA) (Pub. 
L. 97-219) established the SBIR Program. This document can be found at 
http://thomas.loc.gov/bss/d097/d097laws.html. According to its 
legislative history, SBIDA was enacted to increase the rate of 
productivity in the United States by increasing technological 
innovations, especially those innovations of small concerns. In 
addition, the SBIR Program was created to increase the efficiency of 
federally funded research and development (R&D) by providing a long-
needed mechanism to enable agency personnel to tap the resources of 
small, innovative firms; to facilitate the conversion of federally 
funded research results into commercially viable products and services; 
and to increase the share of the Federal R&D budget awarded to small 
businesses.
    The SBA's Small Business Size Regulations establish small business 
eligibility criteria for receiving awards under the SBIR Program (13 
CFR 121.701-121.703). Section 121.702(a) states that to be eligible to 
compete for award of an SBIR funding agreement, a business concern must 
``(b)e at least 51% owned and controlled by one or more individuals who 
are citizens of, or permanent resident aliens in, the United States; * 
* *.'' A concern may not receive an SBIR award if it is more than 50% 
owned and controlled by another business concern, such as a corporation 
or partnership, even if that concern is at least 51% owned and 
controlled by citizens of, or permanent resident aliens in, the United 
States.
    SBIR Program managers at participating agencies will often receive 
a proposal from a concern that is owned by another concern. The 
concern's size, together with its parent company, will often be below 
the 500 employee small business size standard for an award, while its 
parent is at least 51% owned and controlled by one or more U.S. 
citizens or permanent resident aliens. However, because it is more than 
50% owned by this other concern, it is ineligible for an SBIR award. 
Consequently, potential SBIR awards go unawarded because there may be 
no other meritorious and feasible proposals from qualified concerns, 
and the innovations of otherwise eligible small business concerns go 
unfunded.
    The SBA believes that when Congress established the SBIR Program 
and when the SBA initially wrote its regulations to comply with SBIDA, 
there were few if any small businesses wholly owned by other entities 
interested in participating in the program. SBIDA did not preclude the 
SBA from including them in the program with its original regulations, 
which it could have done had it been aware that they existed as 
potential participants.
    The SBA's experience over the last several years has led it to 
believe that it should reconsider its policy on this eligibility 
restriction. The SBA is particularly concerned about the anomalous 
situation that occurs under the current regulations. A parent company 
with a wholly owned subsidiary can compete as an eligible small 
business for SBIR funding, but its wholly subsidiary cannot compete in 
its own name. The SBA believes this is an unnecessary restriction which 
results in either a wholly owned subsidiary not competing or having to 
compete through the parent company (which it would not otherwise do).

The SBA's Proposals

    Without modifying the size standard requiring that a concern, 
together with its affiliates, may have no more than 500 employees, the 
SBA proposes to revise Sec.  121.702 to allow an SBIR funding awardee 
to be either:

[[Page 33413]]

    (1) A for-profit business concern, as defined in Sec.  121.105, 
that is at least 51% owned and controlled by one or more individuals 
who are citizens of the United States, or permanent resident aliens in 
the United States; or,
    (2) A for-profit business concern that is 100% owned by another 
for-profit business concern, as defined in Sec.  121.105, that is 
itself at least 51% owned and controlled by one or more individuals who 
are citizens of the United States, or permanent resident aliens in the 
United States.
    The SBA also proposes to revise the first sentence of Sec.  121.702 
by changing ``To be eligible to compete for award * * *'' to ``To be 
eligible for award * * *'' Under this proposed change, an applicant for 
an SBIR award would not need to meet the eligibility requirements when 
it submits its proposal. Rather, the applicant would have to be 
eligible at the time of the award. Section 121.702 is the only 
regulatory reference requiring that the applicant be eligible for an 
award. This proposed change would make Sec.  121.702 consistent with 
Sec.  121.704, which sets forth when the SBA determines the size status 
of a business concern, and with the ``Policy Directive for the Small 
Business Innovation Research (SBIR) Program'' (Directive) (67 FR 60072, 
dated September 24, 2002), both of which require that the concern be 
eligible when it receives the SBIR award.
    This proposed rule broadens program eligibility, but at the same 
time it adheres to the purpose of the SBIR Program--it seeks to 
increase productivity in the U.S. by increasing innovations of U.S. 
owned small business concerns. This proposed rule addresses only the 
ownership component pertaining to SBIR eligibility, maintains the 500 
employee size standard, and changes no part of the definition of 
``concern'' in Sec.  121.105 and in the Directive. That is, a concern 
must be, besides meeting the 500 employee size standard, organized for 
profit, have a place of business located in the United States, and 
operate primarily within the United States or make a significant 
contribution to the U.S. economy through payment of taxes or use of 
American products, materials or labor.

Request for Comments

    The SBA seeks the public's comment on this proposed rule, and 
requests specific comments on at least the following:
    (1) Whether a business concern owned by another business concern 
should be eligible for award of funding agreements in the SBA's SBIR 
Program;
    (2) Whether ownership of the SBIR awardee should be limited to only 
one other concern, or whether the awardee could be owned by more than 
one business concern;
    (3) If the SBIR awardee could be owned by more than one other 
concern, how SBIR Program managers could be assured that the ultimate 
ownership of the awardee is ``at least 51% owned and controlled by one 
or more individuals who are citizens of, or permanent resident aliens 
in, the United States;''
    (4) How many firms may become eligible for SBIR awards under this 
proposed rule, if the SBA adopts it as a final rule;
    (5) Whether the increased number of eligible business enterprises 
would create additional competition that would adversely affect 
research and development (R&D) concerns that meet the current ownership 
requirement;
    (6) Whether permitting an R&D concern owned and controlled by 
another for-profit business concern that is itself ``at least 51% owned 
and controlled by one or more individuals who are citizens of, or 
permanent resident aliens in, the United States'' is consistent with 
the Congressional intent that the SBIR Program benefit small U.S. 
business concerns.

Compliance With Executive Orders 12866, 12988, and 13132, the Paperwork 
Reduction Act (44 U.S.C. Ch. 35), and the Regulatory Flexibility Act (5 
U.S.C. 601-612)

    The Office of Management and Budget (OMB) has determined that this 
proposed rule is a significant regulatory action for purposes of 
Executive Order 12866. Small business size standards determine what 
businesses are eligible for Federal small business programs. This 
proposed rule will not affect small business size standards, but may 
affect the number of awards to different small businesses pursuant to 
the SBIR Program. The SBA's Regulatory Impact Analysis follows.

Regulatory Impact Analysis

1. Need for This Regulatory Action

    The SBA believes it should revise its Small Business Size 
Regulations to allow small businesses wholly owned by other for-profit 
business concerns to participate in the SBIR Program, because doing so 
will render the SBIR size eligibility requirements more consistent with 
the intent of Congress in SBIDA. Under Sec.  121.702(a), an R&D company 
eligible for SBIR funding can be of any legal form, and must meet two 
criteria: (1) it must be organized for profit; that is, it must meet 
the definition of ``business concern'' in Sec.  121.105; and (2) it 
must be 51% owned and controlled by one or more individuals who are 
citizens of, or permanent resident aliens in, the United States. 
However, if that eligible concern has a wholly owned subsidiary, the 
rule precludes the subsidiary from being eligible for SBIR funding. 
This is true, even though the employees of the subsidiary are included 
in determining whether the eligible concern meets the 500 employee size 
standard. As discussed in the Preamble, the SBA believes this is an 
unnecessary restriction on potential SBIR participants.
    Modifying the type of concern that could receive an SBIR award will 
raise the number and quality of technological innovations by small 
concerns, as Congress intended in SBIDA. Agency SBIR Program managers 
will be able to involve more small businesses in the SBIR Program, make 
awards that Congress and their agencies have funded but would likely go 
unawarded, and administer the program more consistently.
    The SBA is chartered to aid and assist small businesses through a 
variety of financial, procurement, business development and advocacy 
programs. To effectively assist intended beneficiaries of these 
programs, the SBA must establish distinct definitions of what it means 
to be a small business and define what small businesses are eligible 
for various Federal Government programs. The Small Business Act (15 
U.S.C. 632(a)) delegates responsibility for establishing small business 
definitions to the SBA Administrator.
    R&D concerns compete for SBIR awards based on technology, merit, 
feasibility and commercialization plans, not on cost. Newly eligible 
concerns might compete with one another for the SBIR awards that 
generally go unawarded, and with current program participants for all 
program awards as well. The proposed revision is consistent with the 
SBA's statutory mandate to assist small business. This proposed 
regulatory action will promote the Administrator's objectives. One of 
the Administrator's objectives is to help individual small businesses 
succeed through fair and equitable access to capital and credit. 
Reviewing and modifying the SBA's Small Business Size Regulations, when 
appropriate, ensures that intended beneficiaries have access to small 
business programs designed to assist them.

[[Page 33414]]

2. Potential Benefits and Costs of This Regulation

    Small R&D concerns that become eligible for SBIR Program awards 
will be the primary beneficiaries of this rule. Specifically, benefits 
will flow to some concerns that are currently ineligible for SBIR 
awards solely because they are wholly owned subsidiaries. If the SBA 
adopts this proposal as a final rule, small concerns that are 100% 
owned and controlled by another for-profit business concern that is 
itself 51% owned and controlled by one or more individuals who are 
citizens of, or permanent resident aliens in, the United States, will 
be eligible for SBIR awards; that is, provided it meets the 500 
employees size standard and any other SBIR eligibility requirements.
    The SBA cannot accurately determine how many concerns will be 
competing for SBIR awards because there are no data on business size by 
organizational structure to support a reasonable estimate. However, the 
SBA believes that there are about 50 to 100 concerns that might 
benefit. The SBA bases this estimate on the fact that a small number of 
such concerns have made inquiries about the program or expressed an 
interest in participating. Also, SBIR Program managers have relayed to 
the SBA their experiences with having to deny awards to those concerns 
that do apply. The SBA believes that these companies should not be 
precluded from participating. The SBA welcomes comments discussing the 
potential number of concerns that could become eligible under this rule 
and on the effect their eligibility would have on other small concerns.
    In fiscal year 2002, SBIR awards totaled about 5,000 and $1.5 
billion in funding. The SBA estimates that as much as $85 million could 
be awarded annually to newly eligible concerns. Phase I awards are as 
large as $100,000, and Phase II awards can be as high as $750,000. The 
maximum number of annual awards could be as high as 100, a 2% increase 
each year. If the maximum number of SBIR awards were made for their 
maximum possible award amounts, this could represent an additional $85 
million awarded to small R&D concerns. However, the average SBIR award 
is about $300,000, based on the SBIR Program's current annual average 
of approximately 5,000 awards and $1.5 billion. An additional 100 
(estimated maximum number) SBIR awards to R&D concerns would more 
likely total about $30 million. This, rather than $85 million, reflects 
the more realistic benefits to the newly eligible concerns.
    Federal Government agencies with SBIR Programs will also benefit, 
because they will be able to tap the resources of small innovative 
firms, to facilitate the conversion of federally funded research 
results into commercially viable products and services, and to increase 
the share of the Federal R&D budget awarded to small businesses, as 
discussed in SBIDA's legislative history, more than they do now. 
Because that is Congress' intent, the rule, if the SBA adopts it as 
final, will further help Federal agencies to meet their mandate to 
assist small business concerns. There could be up to 2% more small 
business concerns that receive SBIR awards. Not only will there be more 
concerns competing for SBIR awards, but there will be more awards made 
to more small businesses.
    The Federal Government's increased cost will equal the additional 
SBIR awards made because more concerns will be eligible under this 
proposed rule. However, it will require no additional appropriations 
for the participating agencies. Presently, some SBIR funds are unspent. 
Applicants with meritorious and feasible proposals are ineligible 
because they are wholly owned subsidiaries of other concerns, not 
because they with their affiliates exceed the 500 employee size 
standard. This rule, therefore, may possibly increase the cost to the 
government by up to $85 million per year in funds spent. However, the 
awards would come from already appropriated and budgeted SBIR funds, 
ordinarily left unspent.
    The SBA estimates that there will be relatively few distributional 
effects if this proposed rule is adopted. The 50 to 100 annual awards 
that are unawarded not only do not go to small businesses, but they do 
not go to any concerns. Again, as stated above, The SBA cannot 
accurately determine how many concerns might become eligible for these 
awards, because there are no data to support an estimate of the 
distributional effects, but the SBA believes it could be no more than 
100 awards made to newly eligible concerns. These newly eligible 
concerns may obtain SBIR funding that would otherwise be awarded to 
existing small concerns. With the relatively small proportion of 
additional firms and the fact that few small concerns obtain multiple 
SBIR awards, the SBA believes only a few small concerns could lose SBIR 
opportunities. If so, it is important to note that the newly eligible 
firms are not more competitive due to size, but differ only on the 
basis of organizational structure. The SBA specifically requests 
comments on the proposal's impact on current SBIR participants.
    This is not a major rule, however, under the Congressional Review 
Act, 5 U.S.C. 800. For purposes of the Paperwork Reduction Act, 44 
U.S.C. Ch. 35, the SBA has determined that this rule would not impose 
new reporting or recordkeeping requirements, other than those now 
required of the SBA and Federal agencies that request R&D proposals 
under the SBIR Program. For purposes of Executive Order 13132, the SBA 
has determined that this rule does not have any federalism implications 
warranting the preparation of a Federalism Assessment. For purposes of 
Executive Order 12988, the SBA has determined that this rule is 
drafted, to the extent practicable, in accordance with the standards 
set forth in that order.

Initial Regulatory Flexibility Analysis

    Under the Regulatory Flexibility Act, the SBA has determined that 
this rule may have a significant economic effect on a substantial 
number of small entities. The SBA estimates that an additional 50 to 
100 small concerns may become eligible for the SBIR Program and obtain 
up to $85 million in funding agreements. Immediately below, the SBA 
sets forth an Initial Regulatory Flexibility Analysis (IRFA) of this 
rule providing the following: (1) The need for and objective of the 
rule; (2) a description and estimate of the number of small concerns to 
which the rule will apply; (3) projected reporting, recordkeeping, and 
other compliance requirements of the rule; (4) relevant Federal rules 
that may duplicate, overlap or conflict with the rule; and (5) 
alternatives to allow the Agency to accomplish its regulatory 
objectives while minimizing the impact on small entities.

(1) Need and Objective of the Rule

    There are, the SBA believes, a number of concerns that are 
currently precluded from participating in the SBIR Program, solely 
because of their ownership structure. Approximately 50 to 100 SBIR 
awards go unawarded annually because there are no meritorious and 
feasible proposals from qualified concerns that could be eligible, 
except for the fact that they do not meet the ownership criteria to 
participate in the SBIR Program. Congress, with SBIDA, did not define 
what concerns were eligible based on ownership; it stated that the 
purpose of the SBIR Program is to increase the share of the Federal R&D 
budget awarded to small businesses. The SBA proposes to make eligible 
concerns that are wholly owned by other for-profit business concerns 
eligible for SBIR awards. If the parent concern is not

[[Page 33415]]

organized for profit, the subsidiary would not be eligible because not-
for-profit entities are not eligible for the SBIR Program. Further, the 
legislative history of SBIDA states that small business concerns have 
trouble competing with not-for-profit entities. The proposed change to 
size eligibility for the SBIR Program will more accurately define the 
type of small concern that the SBA believes meets the intent of 
Congress in SBIDA.

(2) Description and Estimate of the Number of Small Entities to Which 
the Rule Will Apply

    The SBA cannot determine precisely how many concerns would become 
eligible as a result of this rule, if adopted, because it has no data 
on how many wholly owned subsidiaries there are in the United States. 
In fiscal year 2002, there were about 5,000 annual SBIR awards for 
approximately $1.5 billion, less than 2% of which are multiple awards. 
The SBA believes that between 50 to 100 concerns will become eligible 
under this rule, as discussed above.
    The SBA believes that the additional eligible concerns will not 
have a significant impact on existing small concerns. While there are 
approximately 5,000 annual SBIR awards, over 98% are awarded to 
concerns that receive no other awards during the year. That is, there 
are approximately 4,900 awards in any given year to approximately 4,900 
individual concerns. The SBA estimates that there are on average three 
concerns competing for any given award. There would be, therefore, 
about 15,000 concerns seeking SBIR awards. The SBA does not believe 
that an additional 100 competitors, about 0.7%, will add significant 
competition for SBIR awards.
    The SBA recognizes that newly eligible firms might be viewed as 
competition for those firms now receiving awards, because this rule 
could increase the number of concerns eligible for SBIR. However, newly 
eligible firms under this rule will not be larger in size than current 
participants. This rule will not increase the population of eligible 
firms by adding larger concerns; it will only add concerns with 
different ownership structures. Therefore, newly eligible concerns 
competing for SBIR awards will not have the benefits that generally 
accrue to larger concerns. While there will be a small increase in the 
number of concerns competing, they will not be more competitive due to 
their size.
    The SBA also believes that many of the applicants who have been 
denied SBIR awards, or others that do not apply, are wholly owned 
subsidiaries of current and past participants in the SBIR Program. If 
the proposed rule is implemented as final, wholly owned subsidiaries of 
concerns that have in the past or that now participate in the SBIR 
Program can receive SBIR awards, provided they are otherwise eligible. 
The SBA's experience is that some participating concerns subcontract, 
to the degree permitted by the Directive, some of their projects to 
their subsidiaries. The SBA does not object to this practice. The SBA 
believes these concerns would prefer to have their subsidiaries 
eligible to submit proposals and receive awards. Further, when the 
parent concern is eligible, the SBA does not consider its newly 
eligible subsidiary as adverse competition for SBIR Program awards. The 
SBA has specifically requested comments on this issue in the 
Supplementary Information above to assess how this proposed rule will 
effect competition in the SBIR Program.
    Participating agencies have no limit to the number and amount of 
awards they may make in a given fiscal year. The agencies have goals 
and objectives, but they are not limited to those levels. This rule, if 
the SBA adopts it as a final rule, will open up opportunities for more 
small R&D concerns to participate in the SBIR Program.

(3) Projected Reporting or Recordkeeping, or Other Compliance 
Requirements of This Rule

    This proposed eligibility requirement does not impose any 
additional reporting, recordkeeping or other compliance requirements on 
small entities for the SBA's programs. It also does not create 
additional costs on a business to determine whether or not it qualifies 
as a small business. A business need only examine existing business 
information to determine its eligibility, such as its Federal tax 
returns. In addition, this rule does not impose any new information 
collecting requirements from the SBA which requires approval by OMB 
under the Paperwork Reduction Act of 1980, 44 U.S.C. 3501-3520.

(4) Relevant Federal Rules That May Duplicate, Overlap or Conflict With 
the Rule

    The SBA's Small Business Size Regulations may in some instances 
overlap other Federal rules that use the SBA's small business size 
standards to define a small business. However, this proposed rule is 
limited to a single program and does not conflict with other regulatory 
requirements, or any small business program, other than the SBIR 
Program's Policy Directive. However, if this proposed change is adopted 
as final, the SBA will amend the Directive so that it is consistent 
with this rule.

(5) Alternatives To Allow the Agency To Accomplish Its Regulatory 
Objectives While Minimizing the Impact on Small Entities

    The SBA considered permitting concerns that are less than wholly 
owned by other concerns, or are owned by more than one other concern, 
to be eligible for SBIR awards. The SBA believes that in such cases it 
would be virtually impossible to assure that SBIR awardees are 
ultimately at least 51% owned and controlled by one or more individuals 
who are citizens of, or permanent resident aliens in, the United 
States. To verify eligibility under those circumstances could require 
more reporting requirements for SBIR applicants. The SBA believes that 
the additional reporting requirements from applicants to prove their 
small business status would unnecessarily burden small concerns. The 
SBA is also concerned about how SBIR Program managers could be assured 
that the ultimate ownership of the awardee is an eligible small 
business for the SBIR Program under this alternative. However, the SBA 
specifically requests comment on whether this alternative is 
administratively feasible.

List of Subjects in 13 CFR Part 121

    Administrative practice and procedure, Government procurement, 
Government property, Grant programs--business, Loan programs--business, 
Reporting and recordkeeping requirements, Small businesses.

    For the reasons set forth in the Preamble, the SBA proposes to 
amend 13 CFR part 121 as follows:

PART 121--SMALL BUSINESS SIZE REGULATIONS

    1. The authority citation for part 121 continues to read as 
follows:

    Authority: 15 U.S.C. 632(a), 634(b)(6), 637(a), 638, 644(c), and 
662(5); and Sec. 304, Pub. L. 103-403, 108 Stat. 4175, 4188.

    2. Revise Sec.  121.702 to read as follows:


Sec.  121.702  What size standards are applicable to the SBIR program?

    To be eligible for award of funding agreements in the SBA's Small 
Business Innovation Research (SBIR) program, a business concern must 
meet the following criteria:
    (a) The concern must be either:
    (1) At least 51 percent owned and controlled by one or more 
individuals who are citizens of the United States, or

[[Page 33416]]

permanent resident aliens in the United States; or,
    (2) 100 percent owned and controlled by another business concern 
that is itself at least 51 percent owned and controlled by one or more 
individuals who are citizens of the United States, or permanent 
resident aliens in the United States; and
    (b) Not have more than 500 employees, including affiliates.

    Dated: April 9, 2003.
Hector V. Barreto,
Administrator.
[FR Doc. 03-14036 Filed 6-3-03; 8:45 am]
BILLING CODE 8025-01-P