The Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs, touted as “America’s Seed Fund,” seek to foster a healthy environment for small business startups to innovate and provide a path to private-sector commercialization of new technologies.
While the program has enjoyed a fair amount of success with notable companies like Qualcomm, 23andMe, Biogen, and Sonicare getting their start as SBIR grant recipients, it has also been tested by exploitative “SBIR mills” and concerns have grown about the program unwittingly facilitating technological cessation to China.
Established in 1982, SBIR and STTR programs were set to expire on September 30 absent Congressional intervention. However, on the eve of that expiration date, the House voted overwhelmingly to reauthorize the almost $4 billion effort through 2025, with strings attached poised to reshape the program’s administration. President Biden then soon signed the reauthorization bill.
There is a perception within the industry and Congress, that a small number of companies – with no intention to commercialize their innovations – win a large number of SBIR contracts due partly to sophisticated proposal writing capabilities and industry know-how. These companies are seen as a drain on programmatic resources and antithetical to the program’s mission. Others see SBIR mills as a Congressional boogeyman that limits the number of awards. These advocates argue that innovation is not a simple concept. Rather, it often requires a long horizon, multiple investments, and supporting inventions.
Regardless, the recent legislation looks to reign in companies receiving over 40 SBIR awards by doubling the benchmark requirements. First, companies with more than 50 Phase I SBIR awards over the past five years must now show a 50% transition rate to Phase II awards. Small businesses that have received 50 Phase II awards over the last five years must show “$250,000 in aggregate sales and investments per Phase II award.” Similarly, small businesses receiving 100 Phase II awards must show an average of $450,000 in sales and investments per award. Small businesses that fail to meet the enhanced benchmarks are subject to a 20 award cap on Phase I and Direct to Phase II annual awards for the next 12 months.
Recently, Congress has positioned American technological innovation as an increasingly important counterweight to rising Chinese security threats. Some see the reauthorization and its efforts to weed out foreign ties to Congressional funding as an extension of overall Congressional momentum on the issue. This comes as an April 2021 Department of Defense study found that China is targeting companies receiving SBIR funds. The report documented SBIR participants who dissolved their American corporations to continue working for the People’s Liberation Army.
The new legislation creates several new requirements related to “foreign countries of concern,” which the legislation currently defines as China, Russia, Iran and North Korea. All small businesses upon submitting a proposal must now disclose the identity of those affiliated with “any foreign talent recruitment programs of foreign countries of concern,” joint ventures or subsidiaries with foreign affiliations, contractual obligations with foreign entities, the percentage of venture capital with a foreign affiliation, and “any technology licensing of intellectual property sales to a foreign country of concern…during the 5-year period preceding submission of the proposal.” The technology licensing disclosure is applied retroactively. Companies in compliance with SBIR requirements just a month ago are now subject to these disclosure requirements.
The bill also calls for establishing a “due diligence program” necessary to vet small businesses applying for federal funding for national security risks. The program will evaluate the “cybersecurity practices, patent analysis, employee analysis, and foreign ownership” of small businesses. The SBA will coordinate with the Office of Science and Technology Policy (OSTP) and the Committee on Foreign Investment in the United States (CFIUS) to provide further guidance.
National Security-Related Claw-Back Provisions
The new legislation also added two mechanisms for the government to claw back federal funds. First, upon a material misstatement from an SBIR recipient, the federal agency can force repayment of the appropriated funds if it determines that the misstatement poses a risk to national security. Additionally, if a change in ownership, entity structure or “other substantial change in circumstances of the small business concern” is determined to threaten national security, the agency can recover the funds.
The bill also requires additional oversight of the program going forward. The Government Accountability Office must submit a study, to be made publicly available within the next 18 months, focused on those small businesses awarded more than 50 Phase II SBIR awards. The study will analyze the impact of these firms on the program, their ability to commercialize inventions, and their impact on new entrants. The study will also evaluate the increased minimum performance standards, other potential award caps and “lifetime program earning caps,” and recommend alternative minimum performance standards. The legislation requires a second study to review subcontracting on SBIR and STTR programs, its effects on the overall SBIR mission, and to ensure awardees comply with the Federal Accountability and Transparency Act.
Going Forward for Small Businesses
The programmatic changes to the SBIR programs reflect a growing congressional appetite to counter China through technological leadership while reigning in spending costs and ensuring the program’s ultimate mission is realized. The changes place a higher administrative burden on many SBIR awardees. Companies readying new applications should gather information on potential foreign investments, intellectual property sales, and technology licensing to prepare for enhanced filing requirements.
Additionally, while the Foreign Countries of Concerns designation currently only applies to China, North Korea, Russia and Iran, other countries like Belarus will likely be added to the list. Small businesses with ties to other countries associated with national security concerns should consider this when making investment and procurement decisions.
For more information on the firm’s Government Contracts Practice, and specifically, assistance on the new SBIR rules, contact the author at email@example.com.