GAO Finds That Federal Agencies Have Made Few SBIR Awards to Small Businesses Majority-Owned by Multiple Venture Capital Operating Companies, Hedge Funds, or Private Equity Firms

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The purposes of the Small Business Innovation Research (“SBIR”) program include, among other things, the use of small businesses to meet federally funded R&D needs and the fostering and encouragement of participation by SDBs and WOSBs in technological innovation. Federal agencies with obligations of more than $100 million for extramural R&D activities (that is, R&D conducted by non-federal employees outside of federal facilities) must establish an SBIR program and are required to spend a percentage of their extramural R&D obligations for each year. For fiscal year 2017 and in each fiscal year after, the percentage that must be spent on SBIR awards is 3.2 percent. Each participating agency’s SBIR program is surveyed and monitored by SBA.

In order to receive SBIR awards, a small business must satisfy certain ownership and other eligibility requirements. The SBIR/STTR Reauthorization Act of 2011 amended the Small Business Act to authorize agencies to make SBIR awards to small businesses that are majority-owned by multiple venture capital operation companies, hedge funds, or private equity firms (“multiple investment companies and funds”). Upon providing a written determination to the SBA Administrator and specified congressional committees, agencies with SBIR programs may make SBIR awards to small businesses majority-owned by multiple investment companies and funds.

According to a GAO report to Congress, issued on December 21, 2018, during fiscal years 2015 through 2018, only three federal agencies with SBIR programs have made use of their authority to make SBIR awards to such small businesses majority-owned by multiple investment companies and funds. The three agencies are the Department of Health and Human Services’ National Institutes of Health, the Department of Energy’s Advanced Research Projects Agency-Energy, and the Department of Education’s Institute for Educational Sciences. Even the obligated amounts awarded by these three agencies were limited. There were only 60 such awards constituting only $43.6 million for that period, representing between 0.1 percent and 2.7 percent of their total obligations for the SBIR program each year.

Most agencies that participated in the SBIR program did not use their authority to make awards to such small businesses, as they did not believe that opening the SBIR program to them would substantially contribute to the agencies’ missions. Among the stated reasons why most agencies did not make SBIR awards to such small businesses were the following: (1) unknown or small level of interest from such businesses; (2) a belief that such companies do not need SBIR funds; (3) focus of program on early-stage research; (4) limited funding for SBIR awards; and (5) limited information on the results from the use of the authority.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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