After reviewing the public comments, SBA published a Final Rule on this issue in the Federal Register on December 3, 2004 (69 FR 70180). In the Final Rule, SBA made one modification to the ownership requirement set forth in the Proposed Rule. It changed the proposed requirement that the subsidiary be 100 percent owned and controlled by another for-profit business to the requirement that it be at least 51 percent owned and controlled by another for-profit business. Based upon the comments received, the SBA considered its original proposal to be unnecessarily limiting. The Final Rule therefore provides that an SBIR awardee must meet the following requirements: it must be either (1) a for-profit business concern that is at least 51 percent owned and controlled by one or more individuals who are citizens of, or permanent resident aliens in, the United States (as the pre-existing regulations required); or (2) a for-profit business concern that is at least 51 percent owned and controlled by another for-profit business that is itself 51 percent owned and controlled by individuals who are citizens of, or permanent resident aliens in, the United States. The Final Rule became effective January 3, 2005.
During the period that SBA was developing the proposed rule, SBA’s Office of Hearings and Appeals (OHA) received an appeal from a company that was found ineligible for the SBIR Program because it was not majority owned by individuals. During the appeal it was argued that the term “individual” in the program’s 51 percent ownership requirement should be interpreted to include non-corporate institutional investors such as Venture Capital Companies (VCCs). On May 29, 2003, OHA denied the appeal maintaining the long-standing interpretation that an “individual” is a natural person. This decision reaffirms the eligibility requirements set forth for the SBIR Program.
The 51 percent requirement is there to distinguish between individual owners and owners that are institutional entities to ensure that SBIR funds go only to small, independent U.S. firms. It is important to note that the OHA decision constituted neither a new eligibility rule, nor a new restriction on venture capital financing within the SBIR Program. In fact, based on the new final rule SBA believes this provides further opportunities for venture capital involvement under the SBIR program.
SBA wants to ensure that the integrity of the program is maintained and that it remains a program for small businesses. VC participation has been allowed and encouraged since the inception of the program. Currently, more than one venture capital company may invest any amount of money into small businesses that receive SBIR awards, with the only restriction that they cannot in concert own more than 49 percent and/or have the ability to control the SBIR awardee. In addition, if a VCC is for profit and is owned at least 51 percent by one or more individuals who are U.S. citizens or permanent resident aliens, it may own more than 49 percent of the SBIR awardee so long as the awardee and its affiliates (including the VCC and its affiliates) have no more than 500 employees in total.
The option of expanding VCC participation raises a number of issues. For example, exempting VC or other institutional investors from affiliation in size determination could