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Proposed SBA Rule Changes Impacting Small Business Government Contractors: Understanding Negative Control and Extraordinary Circumstances
SBA Proposes Rule Changes Impacting Small Business Contractors
The Small Business Administration (SBA) recently released a proposed rulemaking that could have significant implications for government contractors. The proposed rule aims to create uniformity across SBA’s socioeconomic programs, including the 8(a) Business Development, Women-Owned Small Business (WOSB), and Service-Disabled Veteran-Owned Small Business (SDVOSB) programs. One major proposed change that has caught the attention of many is the impact on small businesses with minority shareholders or investors.
Under the proposed rule, the concept of “negative control” would be redefined. Negative control refers to the ability of a person or company to block certain actions within a company, potentially leading to affiliation issues or disqualification from small business programs. The proposed rule would limit the rights of minority owners and could make it challenging for small businesses to obtain equity investments.
Currently, there are only five permissible “extraordinary circumstances” where a minority shareholder can have a controlling say over a company in the SDVOSB program. The proposed rule would add a sixth item, allowing for the amendment of a company’s governing documents to remove a shareholder’s authority to block certain actions.
These changes could have a significant impact on small businesses seeking equity funding, as many investors and minority shareholders may want more protections for their investment. SBA is seeking public comments on whether the proposed exceptions are sufficient or if additional exceptions should be included.
In addition to the changes related to negative control, the proposed rule also includes other revisions to create uniformity across socioeconomic programs. These changes include harmonizing ownership requirements, aligning language regarding profit distribution, and adding new provisions related to certification and recertification requirements.
Small businesses affected by these proposed changes are encouraged to submit public comments to SBA before the deadline on October 7, 2024. The outcome of these proposed rule changes could have a significant impact on how small businesses operate and seek opportunities in the government contracting space.
