On May 11, 2020 the U.S. Small Business Administration (SBA) published a Final Rule in the Federal Register. Although the focus of the Final Rule is primarily on the WOSB/EDWOSB certification process/requirements (which we will discuss later in this post), there were a few major changes which also directly affect and in our opinion, have a significant impact on 8(a) eligibility requirements for individual-owned companies.
As many of our readers are aware, one of the major requirements of the 8(a) program is that the "applicant" or "applicants" upon whom eligibility is based, must be socially and economically disadvantaged. Up until now, SBA regulations have defined "economic disadvantage" as individuals with personal net worth under $250,000 and whose total assets do not exceed $4 Million. The personal net worth calculation does not include the value of the individual's primary residence and does not include the value of retirement accounts (currently with the caveat that those funds cannot be accessed without incurring a penalty, i.e., meaning that the individual has not yet reached retirement age). In addition, once in the 8(a) program, the net worth "ceiling" increases to $750,000, meaning that the individual must have a personal net worth under $750,000 throughout the company's term in the 8(a) program.
In a downplayed but nonetheless stunning change, and in part due to SBA's articulated desire to achieve more standardization and consistency among the various programs it administers, the Final Rule increases the personal net worth ceiling from $250,000 to $750,000 for initial eligibility while keeping the ceiling at $750,000 for continuing eligibility. The Final Rule also increases the limit on the value of an individual's total assets from $4 Million to $6 Million. In addition, the Final Rule excludes from the personal net worth calculation, the value of all retirement accounts regardless of the age of the individual/business owner.
From a practical standpoint, these changes mean that many business owners who previously did not qualify for the 8(a) program will now qualify as economically disadvantaged, which in turn means that SBA will likely receive a greater number of 8(a) applications once the Final Rule takes effect on July 15, 2020. While there are a host of other 8(a) eligibility requirements that also present issues for some businesses, economic disadvantage has consistently excluded many interested businesses/business owners from pursuing 8(a) certification.
In addition, although we always encourage our clients to be mindful of their net worth as it relates to 8(a) regulatory compliance no matter where they are in their program term, this change makes it incumbent upon business owners to give careful consideration to their compensation and other financial transactions that could impact their net worth perhaps much sooner in their program term than they would have under the prior standard. We believe that having a significantly different net worth ceiling for initial eligibility and continuing eligibility was based on the assumption that 8(a) certification could lead to a company’s growth and the recognition that such growth could in turn lead to an increase in the disadvantaged owner’s net worth. Particularly for those that are closer to the new ceiling at the time of application for the program, this new uniform economic disadvantage ceiling may not leave much room for growth on the personal side and is something that these individuals should monitor closely so as not to jeopardize a company’s 8(a) status.
As some will recall, the National Defense Authorization Act (NDAA) of 2015, while authorizing sole-source awards to WOSB/EDWOSBs, also instituted a certification requirement for WOSB/EDWOSBs, which therefore eliminated self-certification as an option. Five (5) years later and to Congress’ dismay/frustration, SBA has finally complied with Congress’ mandate regarding certification of WOSB/EDWOSBs. Contrary to what some of you may have heard, SBA’s Final Rule does not require all WOSBs to obtain third-party certification for a fee. Rather, the Final Rule provides several avenues for compliance with the certification requirement; they are:
- SBA’s New Free, Online Application. This online system will not be through certify.sba.gov, so current WOSB/EDWOSBs are being encouraged by SBA to download all of their documents from the repository before July 15. This system will be available beginning on July 15, 2020 and decisions will be issued beginning on October 15, 2020. Again, there is no cost/fee for this option.
- Approved Third-Party Certification. As was previously permitted, the Final Rule keeps the option of obtaining certification through an approved third-party. Please note that existing third-party certifiers do charge a fee for this service.
- Submit proof that the business has been certified as an SDVOSB/VOSB through the U.S. Department of Veterans Affairs Center for Verification and Evaluation. It is not clear at the moment how submission of this will occur; SBA will likely provide further guidance on this through the summer.
- Women-owned businesses that are currently in the 8(a) program will qualify as a WOSB/EDWOSB. Please note that although this same section is noted only under EDWOSB certification and not WOSB certification, SBA notes in the preamble to the Final Rule that they purposely did not include it, implying that inclusion would be redundant since all EDWOSBs are WOSBs.
Readers should keep in mind that WOSB/EDWOSB certification is relevant only for those businesses that are pursuing set-aside or sole-source contracts. Businesses that are pursuing contracts outside of that are still able to self-certify or represent themselves as WOSBs. This provides a general summary of the options which will be available for WOSB/EDWOSB certification moving forward, but again, SBA will likely be putting out additional guidance throughout the coming months, particularly relative to their new online application system.
If you have questions about economic disadvantage, other 8(a) eligibility requirements, the 8(a) application process or WOSB/EDWOSB qualifications, please contact us at: firstname.lastname@example.org.