SBA Corrects Discrepancy in Small Business Joint Venture Rules

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On December 23, 2016, the U.S. Small Business Administration (“SBA”) issued a technical correction to its July 25, 2016 final rule regarding the new mentor-protégé program for all small business concerns to address an inconsistency among the joint venture rules applicable to the SBA’s various small business programs. The SBA’s July 25, 2016 rule provided that when a joint venture is a separate legal entity, the profits of the joint venture must be split commensurate with the joint venturers’ ownership interests. As drafted, this regulation would apply equally to a populated or unpopulated joint venture as long as the joint venture was a separate legal entity. 

In contrast, the SBA’s 8(a) Business Development Program (“8(a) Program”) regulations provide that in an unpopulated 8(a) joint venture, profits are to be split commensurate with the work performed by the joint venture members, not commensurate with the venturers’ ownership interests. See 13 C.F.R. § 124.513(c)(4). Thus, the SBA’s July 25, 2016 rule resulted in an inconsistency between the 8(a) Program’s joint venture rules and the rules governing joint ventures of every other type, including small businesses, service-disabled veteran-owned small business concerns (“SDVO SBC”), participants in the Historically Underutilized Business Zone (“HUBZone”) program, and participants in the women-owned small business (“WOSB”) program. 

However, SBA intended for the joint venture rules for small businesses, SDVO SBCs, and participants in the HUBZone and WOSB programs to be consistent with the 8(a) regulations. Upon discovering this inconsistency, SBA issued the technical correction to make these rules consistent. Accordingly, small business, SDVO SBC, HUBZone and WOSB joint ventures now must state in their joint venture agreement that each small business, or SDVO SBC, HUBZone business, or WOSB, as applicable, “must receive profits from the joint venture commensurate with the work performed by the” small business, SDVO SBC, HUBZone business, or WOSB. See 13 C.F.R. § 125.8(b)(2)(iv); 13 C.F.R. § 125.18(b)(2)(iv); 13 C.F.R. § 126.616(c)(4); 13 C.F.R. § 127.506(c)(4). These regulations are now consistent with the rules for 8(a) joint ventures, which are set out at 13 C.F.R. § 124.513.

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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