The Small Business Administration (SBA) has recently released its long-awaited final rule, bringing essential updates and clarifications to regulations impacting small businesses, including those in the 8(a) Program. This revision affects both small businesses and their partners—ranging from minority investors to larger companies engaging with these firms. A standout feature of the update is the loosening of ownership restrictions for minority owners in 8(a) firms, a change likely to benefit both majority and minority stakeholders. Below, we highlight the key changes and discuss their potential impact.
Expanded Ownership Opportunities for Non-Disadvantaged Partners
Historically, the SBA placed strict limits on the ownership stakes of non-disadvantaged individuals and entities within 8(a) firms. Under previous rules, non-disadvantaged owners could only hold up to 10% in firms in the developmental stage and 20% in the transitional stage, particularly if they owned interests in other 8(a) firms or operated in similar industries. However, the new rule increases these caps: non-disadvantaged partners can now hold up to 20% in the developmental stage and 30% in the transitional stage. This expansion will help 8(a) firms attract experienced partners and secure the resources necessary to grow. Notably, SBA-approved mentors are exempt from this limit, allowing them to hold up to 40%.
Simplified Ownership Changes for 8(a) Firms
Another significant revision pertains to the requirement for SBA approval of ownership changes in 8(a) firms. Previously, any change in ownership, regardless of its impact on qualifying owners, required SBA’s prior approval, adding time and paperwork to the process. While there were a few exceptions, the final rule expands these exceptions, allowing 8(a) firms to make certain ownership adjustments without seeking prior approval.
For example, the rule increases the threshold for SBA approval from 20% to 30%, meaning that non-disadvantaged owners involved in a change of ownership can now hold up to 30% of the firm without needing SBA’s approval. Additionally, the rule introduces a new exception for firms that have never won an 8(a) contract, as long as the principal owners continue to hold more than 50% of the company. Firms in this category must still notify the SBA of changes within 60 days, or before submitting an 8(a) contract offer.
Enhanced Rights for Minority Owners
The final rule also bolsters the rights of minority owners in 8(a) firms, which had been vague in earlier regulations. Under the updated guidelines, minority owners now have the ability to block specific significant decisions within the company, ensuring they are better protected. The rule outlines seven circumstances where minority owners can exert influence, including actions like adding new equity stakeholders, selling or dissolving the company, mergers, and amending corporate governance documents. These protections enable minority owners to safeguard their investments without disrupting the majority owners’ control over day-to-day operations.
Benefits for 8(a) Owners and Investors
These changes represent a major step forward for 8(a) firms and their investors. By removing some of the bureaucratic hurdles associated with ownership changes and increasing ownership flexibility for non-disadvantaged partners, the rule opens up new opportunities for 8(a) firms to grow and attract necessary capital. The expanded ownership caps will allow firms to engage with potential partners who can bring in expertise, resources, and investment.
Moreover, the added protections for minority owners help reduce the investment risk for those considering partnerships with 8(a) firms. These adjustments make 8(a) businesses more appealing to investors by providing clearer mechanisms for managing significant business decisions.
The final rule will take effect on January 16, 2025, and apply to both new and existing contracts, as well as all current and future 8(a) participants.
