Tuesday, January 14th, 2020
The SBA Proposes Significant Changes to Joint Venture Rules

The SBA has proposed significant changes to the rules governing joint ventures as part of its overhaul of the SBA’s small business program regulations.

The 3-2 Rule: Currently, a joint venture may receive a maximum of three contract awards in a two-year period. The proposed rule eliminates the cap on contract awards, but continues the two year limitation period. Within that period, a joint venture may receive unlimited awards and still comply with SBA rules.

Member Substitution: A joint venture qualifies as a small business as long as each member qualifies individually. Joint ventures’ governing documents should protect its small business status by permitting removal of a member that loses its individual small business status. The SBA is considering a new rule that would prohibit that protection. Under the proposed rule, a joint venture’s size would be measured by reviewing the size of both past and present members. A joint venture typically loses the ability to obtain financial and tax information from former members, which would seem to be a significant problem for this proposed rule. If it becomes final, joint venture agreements must adapt to ensure that members have a continuing obligation to provide information necessary to determine the size in accordance with the new rule.

Contracts Requiring a Facility Security Clearance (FCL): That some procuring agencies refuse to award contracts requiring FCLs to joint ventures without the necessary clearance, even if each of its members have that clearance, has been a source of understandable frustration. The SBA has recognized that issue, and is seeking industry’s potential solutions. One possibility is allowing the managing venturer’s FCL to be sufficient for contract award, provided it retains all classified information at its facility.

Calculation of Joint Venture Receipts: A concern is required to include its “proportionate share of joint venture receipts” when calculating its size for revenue-based size standards. The proposed rule clarifies that the “proportionate share” corresponds to the concern’s percentage workshare in the joint venture. The proposed rule also clarifies that no additional action is required if a concern’s proportionate share is already accounted for in its receipts reflecting transactions between the concern and its joint ventures. This should provide welcomed relief and eliminate the all-too-frequent problem of an area office erroneously treating a joint venture as an affiliate or otherwise double counting joint venture receipts.

Comments on these proposed rules and several others are due to the SBA by January 17th, 2020.

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