[Federal Register Volume 69, Number 232 (Friday, December 3, 2004)]
[Rules and Regulations]
[Pages 70180-70185]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-26608]


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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: Final rule.

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SUMMARY: The U.S. Small Business Administration (SBA or Agency) is 
revising its small business size regulations regarding ownership and 
control of Small Business Innovation Research (SBIR) Program awardees. 
The final rule provides that an SBIR awardee must meet the following 
requirements: 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 require); or it must be a for-profit business 
concern that is at least 51% owned and controlled by another 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. This rule does not change the size standard 
requiring that an SBIR awardee, together with its affiliates, have no 
more than 500 employees. Because SBA received a large number of 
comments concerning ownership of SBIR Program participants by Venture 
Capital Companies, SBA will issue an Advanced Notice of Proposed 
Rulemaking seeking additional information this issue.

DATES: This rule is effective January 3, 2005.

FOR FURTHER INFORMATION CONTACT: Carl Jordan, Office of Size Standards, 
at (202) 205-6618, or Edsel Brown, Assistant Administrator for 
Technology, at (202) 205-6540. You may also e-mail questions to 
[email protected].

SUPPLEMENTARY INFORMATION:

Introduction

    On June 4, 2003, the SBA published in the Federal Register (68 FR 
33412) a proposed rule to modify the eligibility requirements for the 
SBIR Program. The proposed rule provided that small business concerns 
(SBCs), which are 100% owned and controlled by another concern, could 
receive SBIR awards so long as the concern that owned and controlled 
the awardee was at least 51% owned and controlled by one or more 
individuals who are citizens of, or permanent resident aliens in, the 
United States. In addition, the SBIR awardee, including its affiliates 
(the parent company and any other affiliates), would have to meet the 
500-employee size standard.
    The SBA sought comments on its proposed rule together with 
alternatives that it considered. Below is a summary and discussion of 
the comments the SBA received, as well as a summary of the final rule.

Summary of Comments

    The SBA received 164 comments on the proposed rule. Although the 
majority of the comments supported a change to the eligibility 
requirements for the SBIR Program, many of them recommended additional 
changes. The significant issues raised by the comments included: (1) 
Less than 100% ownership and control by one other concern; (2) majority 
ownership and control by large businesses; (3) ownership and control by 
more than one concern; (4) foreign ownership and control; (5) majority 
ownership and control by venture capital companies (VCCs); (6) 
ownership by Small Business Investment Companies (SBICs), employee 
stock option plans (ESOPs) and trusts; (7) joint ventures (JVs) in 
relation to the proposed rule; and (8) the 500-employee size standard.

Ownership by Other Concerns or Entities and Foreign Ownership

    The SBA received several comments recommending a rule that would 
allow less than 100% ownership and control of an SBIR participant by 
another concern. Some of these comments stated that the level of 
ownership or control is not material to the overall success of the SBIR 
Program. Others contended that allowing less than 100% ownership or 
control is consistent with the Small Business Innovation Development 
Act (SBIDA) of 1982 (which can be found at http://thomas.loc.gov/bss/d097/d097laws.html) and its legislative history, and in fact furthers 
the SBIDA's intent. One commenter added that requiring 100% ownership 
would stifle investment from others.
    Several commenters recommended a regulation that would allow an 
SBIR awardee to be owned and controlled by two or more other business 
concerns, which in turn are at least 51% owned and controlled by U.S. 
citizens or permanent resident aliens. Four commenters supported the 
idea of multiple corporate owners because it would permit one concern 
to ``spin off'' another, and then add one or more other corporate 
investors in the ``spin off.'' Other commenters recommended variations 
of the proposed rule, including: Allowing indirect ownership by U.S. 
citizens or permanent resident aliens, defining the term individuals to 
include U.S. corporations, and providing for a net worth test for the 
parent company.
    Three commenters argued that allowing foreign ownership and control 
would be consistent with Federal procurement regulations. One commenter 
stated that it needed to go overseas to raise funds through the London 
Stock Exchange. Several commenters believed that rather than have a 
U.S. citizen or permanent resident alien ownership requirement, SBA 
should require the SBIR participant to have a base of operations in the 
United States, incorporate in the United States, employ U.S. citizens 
and/or pay taxes to the United States.
    One commenter recommended allowing nonprofits to own and control 
more than 49% of the SBIR participant, but require the non-profit to 
license its technology exclusively to the start-up so that the non-
profit cannot use the program to its advantage. Several commenters 
supported ownership and control of an SBIR participant by SBICs. One 
commenter stated that it believed the statutes and rules governing 
SBICs, as well as the SBA's regulatory authority over them, could 
provide adequate safeguards against abuse of the SBIR program by such 
larger businesses. One commenter did not support allowing more than 49% 
ownership by an SBIC. Other commenters supported ownership and control 
by trusts for estate/tax planning purposes and by Employee Stock 
Ownership Plans (ESOPs) for investment and employee incentive purposes.
    Conversely, 50 commenters expressed concern that permitting another 
business concern to own an SBIR Program participant could permit large 
companies to participate in the SBIR

[[Page 70181]]

Program via a subsidiary. These commenters opposed the rule change and 
argued that business concerns owned by other business concerns have 
more money than most SBIR participants, which may have only 10 to 50 
employees. In those instances, these smaller SBIR participants will be 
competing against larger participants (which, together with the parent 
company, meet the 500-employee size standard). These commenters did not 
believe this met the purpose and intent of SBIDA. Although several 
commenters supported allowing more than one business concern to own and 
control an SBIR awardee, many also likewise believed that the SBA must 
ensure that only true SBCs receive the SBIR award and directly benefit 
from the program.
    SBA thoroughly reviewed each of the comments received and believes 
that allowing one business concern to own or control at least 51% of an 
SBIR participant, which is in turn at least 51% owned and controlled by 
U.S. citizens or permanent resident aliens, provides SBIR participants 
with the flexibility they need to leverage money and bring in other 
funding sources (such as SBICs) and yet remain small. Pursuant to the 
final rule, ownership of an SBIR awardee is limited to one of the two 
following ways: (1) The awardee must be at least 51% owned and 
controlled by citizens of, or permanent resident aliens in, the United 
States; or, (2) it must be at least 51% owned and controlled by one 
for-profit business concern that itself is at least 51% owned and 
controlled by citizens of, or permanent resident aliens in, the United 
States. With respect to the first eligibility criterion, if the SBIR 
awardee is at least 51% owned and controlled by citizens of, or 
permanent resident aliens in, the United States, other concerns (or 
entities such as non-profits) may participate in its ownership and 
control, but only so long as these concerns together do not own any 
more than 49% of the SBIR concern and do not control the concern as a 
result of their ownership interest. With respect to the second 
eligibility criterion, one for-profit business concern must have 51% or 
more ownership and control of an eligible SBIR awardee (if the awardee 
is not at least 51% owned and controlled by citizens of, or permanent 
resident aliens in, the United States). Other concerns (and entities 
such as non-profits) may have an ownership interest in the SBIR 
participant, but they are limited to 49%, individually or together.
    The SBA believes that requiring that the business concern with the 
controlling interest be at least 51% owned and controlled by U.S. 
citizens or permanent resident aliens (note that SBA does not consider 
entities to be individuals or citizens or permanent resident aliens) 
supports the intent and purpose of SBIDA that the research and 
development (R&D) advances resulting from this program remain in this 
country and benefit the United States. Specifically, SBIDA was enacted 
because ``the rate of productivity increase in the United States ha[d] 
been well below that of all the leading industrial nations, most 
notably Japan and Germany. While this relative decline in American 
productivity [wa]s due to many factors, a major one [wa]s certainly the 
slowdown in our technological innovation.'' S. Rep. No. 194, 97th 
Cong., 1st Sess. 1 (1982). House Report No. 349, Part I, further stated 
that Federal support for R&D was concentrated in big businesses, 
laboratories, universities, and non-profit organizations. It was 
believed that this concentration of private R&D in a few large entities 
was contrary to the national interest and that small science and 
technology-based enterprises, thought of as the most innovative sector 
of the American economy, was excluded from effective participation. 
H.R. Rep. No. 349, 97th Cong., 1st Sess., pt. 1, at 9 (1981). The 
purpose of SBIDA was, and still is, to encourage small business 
participation in R&D to stimulate the American economy.
    Because the purpose of the SBIR program is to increase the rate of 
productivity in the United States by increasing technological 
innovations, especially those innovations of SBCs here in the United 
States, the SBA believes that the legislative history of and purpose of 
SBIDA does not support more than 49% ownership by foreign investors or 
nonprofit institutions. The SBA notes that this rule does not preclude 
foreign or nonprofit investment; it merely limits the amount of 
investment. The SBA also notes that this regulation does not create the 
anomalous situation where an SBIR participant concern is owned and 
controlled by U.S. citizens or permanent resident aliens or a business 
concern that is owned and controlled by U.S. citizens or permanent 
resident aliens, but has a place of business overseas. The regulations, 
set forth at 13 CFR 121.105, specifically define the term ``concern'' 
or ``business concern'' to mean one that is organized for profit, with 
a place of business located in the United States, and which operates 
primarily within the United States or which makes a significant 
contribution to the U.S. economy through payment of taxes or use of 
American products, materials or labor. Therefore, in addition to 
meeting the 51% ownership and control requirements, the SBIR 
participant must meet this definition of ``concern'' or ``business 
concern.'' The SBA notes that this is not a change in policy; all 
business concerns eligible for the SBA assistance as a small business 
concern must meet this definition.
    In addition, the SBA does not believe that allowing ownership by 
other concerns would allow large businesses to participate in the SBIR 
program. For purposes of the SBIR Program, an SBIR awardee, together 
with its affiliates, must be ``small'' for purposes of the program, and 
a concern, together with its affiliates, is deemed to be small only 
when it has no more than 500 employees. The SBA's Small Business Size 
Regulations set forth in 13 CFR 121.103 define affiliation with another 
business concern. According to Sec.  121.103, concerns are affiliates 
of each other when one concern controls or has the power to control the 
other, or a third party or parties controls or has the power to control 
both. The SBA considers factors such as common ownership, common 
management and identity of interest (often found in members of the same 
family) to indicate affiliation. Although control exists when a party 
or parties has more than 50% ownership, it may also exist with 
considerably less than 50% ownership.
    As a result of these affiliation rules, employees of businesses 
that have ownership interests in or control of an SBIR awardee may be 
counted toward the size of the SBIR awardee. Where one firm is a 
subsidiary of another, the parent and subsidiary are affiliates for 
size purposes and their employees would be aggregated in determining 
whether the subsidiary qualified as a small business. Thus, these rules 
would prevent ``large'' businesses from participating in the SBIR 
Program via a subsidiary.
    Further, the SBA notes that under the former rules, a business 
concern could still own an SBIR participant, but was limited to 49% 
ownership. The new rule provides more flexibility in the ownership and 
control of an SBIR participant while still ensuring that only SBCs 
(those with not more than 500 employees, including affiliates) 
participate in the Program.
    The SBA responded by letter or email to those commenters opposed to 
allowing businesses to own an SBIR awardee to clarify what it believed 
was a misunderstanding of the SBA's affiliation regulations and how 
those regulations apply to all of the SBA's programs, including the 
SBIR Program. In response, 15 of the 50 commenters

[[Page 70182]]

withdrew their opposition to the proposed rule and two stated that they 
remained opposed to the proposed rule.
    Finally, the SBA would like to clarify that ESOPs can own SBIR 
awardees and the Agency has specifically addressed this issue in the 
final regulation to avoid any confusion. SBA has also amended the final 
rule to address the issue of ownership by trusts. The SBA understands 
that trusts are oftentimes established for tax reasons, where, as at 
least one commenter explained, an owner may establish a family trust 
for the benefit of her children. The commenter believed that such 
situations should be addressed in the regulations and the SBA agrees. 
For purposes of an ESOP, SBA will treat the plan members and trustees 
as owners. For purposes of a trust, SBA will treat the trustee and 
beneficiaries as owners of the SBIR awardee.

Ownership by VCCs

    The SBA received 60 comments specifically addressing whether VCCs 
should own and control 51% or more of an SBIR awardee. Several 
commenters argued that VCCs should be allowed to own and control 51% or 
more of an SBIR awardee because small innovative business concerns, 
especially those in the biotechnology field, need this capital 
investment. In addition, because many of these VCCs have institutional 
investors, these commenters did not believe that there should be a U.S. 
citizen ownership and control test for such VCC-backed business 
concerns. As a result, some commenters recommended disregarding VCC 
ownership altogether when determining the 51% or more ownership and 
control requirement or suggested that the SBA deem U.S. investment 
companies to be individuals and U.S. citizens for purposes of this 
rule. In addition, some argued that the SBA should modify its 
affiliation provision to disregard affiliation with such VCCs.
    Meanwhile, 20 commenters opposed allowing concerns majority owned 
and controlled by VCCs to be eligible for the SBIR Program. These 
commenters believe that such concerns do not need further funding--such 
as Government funding through an SBIR award--because they already 
receive help from the VCC. In addition, these commenters expressed 
concern about the impact on existing SBCs in seeking R&D support if 
concerns that are majority owned and controlled by VCCs were allowed to 
obtain SBIR funding awards.
    The SBA notes that this final rule makes no distinction between a 
VCC and other for-profit entities. This rule allows a VCC to own and 
control an SBIR awardee, as long as the VCC is itself at least 51% 
owned and controlled by U.S. citizens and permanent resident aliens and 
the SBIR awardee, together with its affiliates, meets the 500-employee 
size standard. However, the specific nature of the relationship between 
a VCC or other investment vehicle, which is in turn more than 50% owned 
by institutional investors, with an SBIR participant is a broader 
policy question than SBA sought to address with the proposed rule. When 
VCCs have control of a firm in which they invest, they are considered 
affiliated with that firm under current rules (Sec.  121.103, ``What is 
affiliation?''), just as any other business entity would be if it had 
ownership or control. Business concerns owned and controlled by VCCs 
with institutional investors would be affiliated with those VCCs and 
institutional investors and, thus, may not meet the SBIR Program's 500-
employee size standard. The SBA stated in the proposed rule that it was 
not changing the rule that a concern, together with its affiliates, 
must meet the 500 employee small business size standard.
    Because of the large number of comments SBA received on the issue 
of affiliation for VCCs, the SBA believes that it warrants further 
consideration. SBA will issue an Advance Notice of Proposed Rulemaking 
seeking additional information on this issue. This action ensures that 
the small business community is aware of SBA's consideration of a 
significant change to the eligibility criteria for the SBIR Program and 
that it has an opportunity to provide information to assist SBA with 
the evaluation of the issue.

The Effects of the Rule on Joint Ventures (JVs)

    Two commenters questioned whether this rule would comply with 
existing provisions on JVs as set forth in the SBA's SBIR Policy 
Directive and whether JVs must have a separate Employer Identification 
Number (EIN). First, the SBA notes that this final rule does not effect 
the eligibility of JVs for SBIR awards as set forth in the SBA's SBIR 
Policy Directive, 67 FR 60072 (Sept. 24, 2002), which was promulgated 
pursuant to notice and comment rulemaking. SBA notes that in addition 
to amending the SBIR Policy Directive on this issue, it proposed an 
amendment to 13 CFR 121.702(a) in 67 FR 70339 (Nov. 22, 2002) to 
address JVs in the SBIR Program. SBA received no comments on that 
proposal, which was identical to the rule set forth in the SBIR Policy 
Directive. As a result, the SBA is amending the regulation to address 
this issue. The final regulation, like the Policy Directive, states 
that joint ventures are eligible for an SBIR award if each entity that 
is part of the venture meets the SBIR ownership and control 
requirements.
    Second, and with respect to the EIN number, this issue was 
addressed in the preamble to the final SBIR Policy Directive. For 
purposes of the SBIR Program, a JV is an association of concerns with 
interests in any degree or proportion by way of a contract, express or 
implied, consorting to engage in and carry out a specific business 
venture for joint profit, for which purpose they combine their efforts, 
property, money, skill, or knowledge, but not on a continuing or 
permanent basis for conducting business generally. Further, for 
purposes of the SBIR Program, a JV is viewed as a business entity in 
determining power to control its management. Therefore, a JV can have 
its own EIN, but it is not required to have one, so long as the purpose 
of the JV is to engage in and carry out a specific business venture.

The 500-Employee Size Standard

    A few commenters recommended that the SBA amend the SBIR program 
size standard from 500 employees to 250 or even 50 employees. One 
commenter maintained that companies with more than 250 employees 
generate $15 million to $20 million annually while another commenter 
believed that companies with 500 employees generate $50 million in 
sales. Both commenters argued that these companies should pursue 
standard government grants and contracts, leaving SBIR funds for 
smaller companies. One commenter maintained that the value of the SBIR 
Program is greatest for the smallest entities, such as those with less 
than 50 employees, who cannot fund innovations from their own profits.
    The proposed rule specifically stated that the SBA was not amending 
the size standard for the SBIR Program and therefore the SBA did not 
propose any alternate size standards. If the SBA determines that it is 
necessary to amend the size standard for the SBIR Program, it will do 
so through a separate rulemaking action, which includes proposing a 
standard for public comment.

Time of Eligibility

    The SBA received one comment on its proposal to revise the first 
sentence of Sec.  121.702 by changing ``To be eligible to compete for 
award * * *'' to read ``To be eligible for award * * *.'' With this 
change, an SBIR awardee would not need to meet the eligibility 
requirements

[[Page 70183]]

when it submits its proposal. Rather, the awardee would need to be 
eligible at the time of the award. According to the commenter, this 
change would allow large businesses to use resources to apply for SBIR 
funding and then establish a small business for purposes of the award.
    The SBA disagrees with this comment. First, the SBA has been 
issuing size determinations for SBIR participants at the time of award 
for several years and is not aware of any instances where a large 
business has become ``small'' for purposes of an SBIR award. The SBA 
believes that, generally, this process proposed by the commenter would 
be too time and money consuming.
    Second, the reason for the departure from the time of self-
certification with the proposal submission requirement applicable to 
other programs is the concern that potential SBIR entrepreneurs often 
are working at large concerns or non-profit institutions (e.g., 
universities) at the time of their initial proposal and, thus, would be 
precluded from the SBIR Program by a ``time of offer'' rule. These 
offerors typically leave their position with the affiliated entity upon 
approval of their proposal and prior to award. Therefore, the SBA is 
promulgating the final rule as proposed.

The SBA's Decision

    In sum, this final rule adopts a modification to the SBA's proposed 
rule. Although the SBA had proposed to allow another concern to own an 
SBIR awardee, the proposal required 100% ownership and control. Based 
on comments received and discussed above, the SBA believes that its 
proposal was unnecessarily limiting. Therefore, without modifying the 
size standard requiring that an SBIR awardee, together with its 
affiliates, have no more than 500 employees, the SBA is revising Sec.  
121.702 to allow an SBIR funding awardee to be either:
    (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, as defined in Sec.  121.105, 
that is at least 51% owned and controlled by another for-profit 
business concern, as defined in Sec.  121.105, that is itself at least 
51% owned and controlled by individuals who are citizens of, or 
permanent resident aliens in, the United States.
    This final rule also adopts the SBA's proposal to revise the first 
sentence of Sec.  121.702 by changing ``To be eligible to compete for 
award * * *'' to read ``To be eligible for award * * *.'' With this 
change, an SBIR awardee does not need to meet the eligibility 
requirements when it submits its proposal. Rather, the awardee must be 
eligible at the time of the award.

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 
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 rule does not effect 
small business size standards, but may effect the number of awards to 
different small businesses under the SBIR Program. This is not a major 
rule, however, under the Congressional Review Act, 5 U.S.C. 800. For 
purposes of Executive Order 12988, the SBA has determined that this 
rule has been drafted, to the extent practicable, in accordance with 
the standards set forth in that order. 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 the Paperwork Reduction Act, 44 U.S.C. Ch. 
35, the SBA has determined that this rule does 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. 
The SBA's Final Regulatory Impact Analysis follows.

Regulatory Impact Analysis

1. Need for This Regulatory Action

    The SBA's experience over the last several years led it to believe 
that it should reconsider its policy on eligibility for SBIR awardees. 
The SBA believes that the former regulation was unnecessarily 
restrictive. The revised rule now allows small businesses owned and 
controlled by no more than one other for-profit business concern to 
participate in the SBIR Program. The SBA believes this regulation will 
increase the number of SBCs eligible for the SBIR Program and therefore 
increase the number and quality of technological innovations by SBCs. 
As a result, this rule, despite the fact it broadens the eligibility 
requirements for SBIR awardees, is still consistent with SBIDA and its 
legislative history.
    The mission of SBA is 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 broad responsibility for establishing small 
business definitions to the SBA Administrator.
    This rule is consistent with the SBA's statutory mandate to assist 
small business. This action will promote the Administrator's objectives 
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.

2. Potential Benefits and Costs of This Regulation

    Small R&D concerns that will become eligible for SBIR Program 
awards are the primary beneficiaries of this rule. Specifically, 
benefits will flow to concerns that were ineligible for SBIR awards 
solely because they were owned and controlled by other concerns, rather 
than natural persons. In addition, companies owned and controlled by 
SBIR participants, which were previously ineligible to participate in 
the SBIR Program, are now eligible.
    In the proposed rule, the SBA could not predict with confidence the 
distributional impact of the rule. The SBA believed that there would be 
about 50 to 100 concerns that might benefit, based on information that, 
in the past, agencies have not awarded approximately 50 to 100 SBIR 
proposals as a result of the former ownership restrictions. Although 
the SBA specifically requested comments on this issue, commenters did 
not offer estimates, but generally agreed with the SBA's estimates.
    In fiscal year 2002, there were approximately 5,000 SBIR awards 
that received approximately $1.5 billion in funding. Therefore, if 100 
newly eligible firms win SBIR awards, the SBA estimates that 
approximately $30 million could be awarded annually to newly eligible 
concerns as a result of this rule.
    Federal Government agencies with SBIR Programs also benefit from 
this rule because it enables them to tap the resources of more small 
innovative

[[Page 70184]]

firms, facilitating the conversion of federally funded research results 
into commercially viable products and services. In keeping with 
Congress' intent, the rule further helps Federal agencies to meet their 
mandate to assist SBCs.
    The Federal Government will incur no additional costs as a result 
of this final rule. By slightly expanding the pool of eligible 
concerns, the rule makes an already competitive program even more 
competitive, which can increase the quality of the projects funded. The 
rule will have no impact on the number of awards given or on the amount 
of funds available for the program.
    The SBA estimated in the proposed rule that there would be 
relatively few distributional effects if it adopted the rule. In the 
past, agencies have not awarded approximately 50 to 100 SBIR proposals 
as a result of the former ownership restrictions. The agencies did not 
issue an award to either small businesses or other than small 
businesses. Again, as stated above, the SBA could not 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 believed it could be no more than 100 awards made 
to newly eligible concerns. Commenters did not dispute this estimate, 
and one stated its assumption that the SBA's estimate of newly eligible 
concerns was correct.

Final 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 could become eligible for the SBIR Program and 
obtain approximately $30 million in funding agreements. Immediately 
below, the SBA sets forth a Final Regulatory Flexibility Analysis 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

    The SBA believes that several SBCs were precluded from 
participating in the SBIR Program under the prior rule, solely because 
of their ownership structure. Participating SBIR agencies have not 
awarded 50 to 100 SBIR proposals annually because there were no 
meritorious and feasible proposals from qualified concerns. In those 
cases, the SBA believes the SBCs were qualified except for the fact 
that they did not meet the ownership criteria.
    One purpose of the SBIR Program is to increase the share of the 
Federal R&D budget awarded to SBCs. In addition, according to SBIDA's 
legislative history, SBCs have difficulty competing with not-for-profit 
entities. Allowing concerns that are at least 51% owned and controlled 
by a single 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 
objectives of the SBIR Program.

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

    The SBA could not precisely determine how many concerns would 
become eligible as a result of the proposed rule, if adopted, because 
it had 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 
different concerns. The SBA estimates that, on average, three concerns 
compete for any given award. Therefore, there are about 15,000 concerns 
seeking SBIR awards. The SBA does not believe that an additional 100 
competitors, about 0.7%, adds significant competition for SBIR awards.
    The SBA recognizes that newly eligible firms might be viewed as 
competition for other small businesses competing for SBIR awards. 
However, newly eligible firms under this rule must, like other 
participants, meet the 500-employee size standard. This rule does not 
increase the population of eligible firms by allowing other than small 
business to participate; it only adds SBCs with different ownership 
structures. Therefore, newly eligible concerns competing for SBIR 
awards do not have the benefits that generally accrue to larger 
concerns. While there will be a small increase in the number of 
concerns competing, the newly eligible firms will not be more 
competitive due to their size.
    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 
opens 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 rule 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 collection requirements from the 
SBA, which would require 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 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, which the SBA will amend to comply with 
this rule.

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

    In its proposed rule, the SBA proposed only to extend eligibility 
to concerns that were owned 100% by another concern. The SBA also 
indicated that it had considered an alternative that would permit 
concerns less than wholly owned or controlled by other concerns, or 
owned or controlled by more than one other concern, to be eligible for 
SBIR awards. Based on comments received to the proposed rule, the SBA 
adopted the alternative that would allow an SBIR participant to be less 
than 100% owned and

[[Page 70185]]

controlled by another concern. However, the rule states that the 
business concern with at least 51% ownership and control of the SBIR 
awardee must be at least 51% owned and controlled by citizens or 
permanent resident aliens in the United States. The SBA believes that 
this regulation provides flexibility with respect to investments while 
ensuring that small R&D concerns obtain SBIR awards.

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.

0
For the reasons set forth in the Preamble, the SBA is amending 13 CFR 
part 121 as follows:

PART 121--SMALL BUSINESS SIZE REGULATIONS

0
1. The authority citation for Part 121 continues to read as follows:

    Authority: 15 U.S.C. 632(a), 634(b)(6), 636(b), 637(a), 644(c), 
and 662(5); and Sec. 304, Pub. L. 103-403, 108 Stat. 4175, 4188, 
Pub. L. 106-24, 113 Stat. 39.


0
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 requirements of paragraphs (a) and (b) below:
    (a) Ownership and control.
    (1) An SBIR awardee must (i) be a concern which 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
    (ii) Be a concern which is at least 51% owned and controlled by 
another business concern that is itself at least 51% owned and 
controlled by individuals who are citizens of, or permanent resident 
aliens in the United States; or
    (iii) Be a joint venture in which each entity to the venture must 
meet the requirements set forth in either paragraphs (a)(1)(i) or 
(a)(1)(ii) of this section.
    (2) If an Employee Stock Option Plan owns all or part of the 
concern, SBA considers each stock trustee and plan member to be an 
owner.
    (3) If a trust owns all or part of the concern, SBA considers each 
trustee and trust beneficiary to be an owner.
    (b) Size. An SBIR awardee, together with its affiliates, not have 
more than 500 employees.

    Dated: November 29, 2004.
Hector V. Barreto,
Administrator.
[FR Doc. 04-26608 Filed 12-2-04; 8:45 am]
BILLING CODE 8025-01-U