The Small Business Innovation Research (SBIR) program has an interesting construction. With seemingly no competition to bring size protests and the successful completion of a previous grant before a second grant, the unusual process can make participants forget that normal Small Business Administration (SBA) size regulations still apply. A recent SBA Office of Hearings and Appeals (OHA) decision reminds SBIR awardees to comply with all affiliation rules and ownership requirements or risk losing follow-on SBIR awards.

In this case, at a “pitch day” presentation, the contracting officer (CO) became suspicious of the appellant’s SBIR eligibility. NFRL LLC, the phase I awardee, identified Lightforce USA as both its subcontractor and affiliate, and disclosed that Lightforce’s vice president was NFRL’s majority owner. Additionally, uncertainty grew around if the principal investigator was employed by NFRL, as was contractually required. Simultaneously, publicly-available information revealed Lightforce was a “foreign owned corporation.” Accordingly, the CO requested the SBA Area Office to determine whether NFRL was eligible under SBIR ownership and control requirements.

SBA requires potential SBIR awardees to comply with the SBIR ownership rules found at 13 C.F.R. § 121.702(a), which requires concerns to be “more than 50% directly owned and controlled by one or more individuals (who are citizens or permanent resident aliens of the United States);” “more than 50% owned by multiple venture capital operating companies, hedge funds, private equity firms or any combination of these;” or, if a joint venture, individually meet both requirements set forth above.

SBA also requires potential SBIR awardees to comply with its affiliation rules set out in the same section, which mimic those applicable to general SBA procurements. NFRL, the phase I awardee, was determined to be ineligible for both SBIR phase II grant awards “through common ownership, the newly-organized concern rule, and the ostensible subcontractor rule.”

Affiliation with Lightforce under the ostensible subcontractor rule was the most problematic for NFRL as it created a joint venture between both concerns implicating the third prong of the SBIR ownership rules. Affiliation through the ostensible subcontractor rule treats a concern and its “ostensible subcontractor” as a joint venture “for size determination purposes.” A concern is an ostensible subcontractor when it “performs [the] primary and vital requirements of a funding agreement…or a subcontractor or subgrantee upon which the concern is unusually reliant.” The primary question is “whether the subcontractor performs primary and vital requirements of a funding agreement.”

The Area Office found Lightforce to be NFRL’s ostensible subcontractor and, therefore, affiliated because Lightforce would perform the “research, breadboard testing, and prototype assembly” for both contracts, which were deemed “primary and vital requirements.” The Area Office concluded that NFRL could not have won the grants “without the employees, past performance, and technical approach” of Lightforce.

With the ostensible subcontractor rule satisfied, NFRL and Lightforce were deemed joint venturers. As touched on above, to meet the ownership and control requirements as a joint venture, both NFRL and Lightforce have to satisfy 13 C.F.R. § 121.702(a)(1)(i) and (a)(1)(b). While NFRL was owned by a U.S. citizen, Lightforce is controlled by an Australian citizen making the concern ineligible.

The Appeal

On appeal, NFRL did not argue that the ostensible contractor rule was inapplicable. Instead, it insisted that its joint venture status solely applies to “size determination purposes” and not determinative for ownership and control requirements. NFRL argued the Area Office should have only used the Ostensible Subcontracting Rule to calculate the total combined number of employees – a numerical threshold the NFRL-Lightforce joint venture would have been under –and therefore satisfied the ownership and control requirements. NFRL contends that size issues are separate and independent from ownership and control, i.e., the eligibility requirements.

OHA disagreed, holding that the plain text of the regulations does not limit the use of the ostensible subcontractor rule to calculate the number of employees. Noting prior decisions, OHA found no distinction between size and ownership and control requirements stating, “the SBIR ownership and control rules at 13 C.F.R. § 121.702(a) are size issues that may be properly examined by an Area Office in conducting a size determination.”

Here, OHA concluded the Area Office was correct, agreeing that NFRL, as a joint venture with Lightforce, could not meet SBIR ownership and control requirements as Lightforce is owned and controlled by an Australian citizen.

Going Forward

The SBIR program was designed to unlock untapped technical knowledge and transformative technological advancements from industries largely outside the traditional government contracting community. Not every SBIR recipient possesses the necessary institutional knowledge to comply with the extensive and sometimes complex regulations governing the program. With that said, failure to follow the regulations can prevent potentially transformative products from advancing and cut off funding to businesses dependent on federal grant money to advance certain technologies.

SBIR recipients should also be wary of potential foreign influence in their businesses. Not only could a joint venture with one foreign-owned concern sink a potential award, but the recent SBIR reauthorization places a particular focus on potential foreign influence issues implementing several new requirements related to “foreign countries of concern,” which the legislation currently defines as China, Russia, Iran and North Korea. The reauthorization establishes a “due diligence program” to vet small businesses for national security risks, requires additional disclosures related to foreign interests, and adds claw-back provisions for national security violations. We wrote about the reauthorization and the new foreign influence requirements in an October blog post.

The decision is an important reminder that affiliation rules, including the ostensible subcontractor rule and newly organized concern rule, apply to potential SBIR awardees. While the regulations can be confusing, they are critical to follow. For more information on the firm’s Government Contracts Practice, and specifically, assistance on the new SBIR rules, contact the author at