8(a) 70 percent Rule Current Presidents – Future Changes

In order for an 8(a) applicant firm to become certified the firm in most cases must not be affiliated with another firm. There are many tests applied to evaluate this factor; however one of the more difficult tests for smaller firms to pass is the 70% rule. In the past the 70% rule became defined and refined by the OHA (Office of Hearings and Appeals)

Identity of Interest
SBA may presume identity of interest among two or more persons/entities, and therefore affiliation, such as:

• Between family members or individuals/firms with common investments and with identical or substantially identical business or economic interests. Such as same customer, vendors, employee locations and business models, etc.
• If a firm economically relies on another firm (e.g., for a certain percentage such as 70% or more of its receipts.
• If a major client of the applicant firm is a prior employer of the 8(a) applicant qualifier.

The two OHA determinations that have refined the 70% interpretation see below:

Argus & Black was an SBA OHA appeal decision that prevented the SBA from penalizing a startup firm form being in violation of the 70% rule. The OHA held that because there was not a long track record for the firm doing exclusive business with a single firm that the applicant could not be denied 8(a) for this reason.

OBXtek, Inc ruling it was found that the firm needs to be in compliance with the 70% rule on the date in which the firm self certifies as a small business and for all intents and purposes this would be on the date in which the firm submits its 8(a) application.

12/29/2014 Affiliation Proposed Rule Change – In paragraph (f)(2), SBA proposes to adopt a presumption that SBA established for the SBIR (Small Business Innovation Research) Program with respect to economic dependence. If a firm derives 70% or more of its revenue from another firm over the previous fiscal year, SBA will presume that the one firm is economically dependent on the other; therefore the two firms are affiliated. Currently there is no fixed percentage that SBA applies when evaluating this criteria.

This is clearly designed to close the current loopholes with respect to the two OHA decisions. We estimate that this change will come into effect in the next 12-16 months and firms looking to apply for 8(a) in the future should be aware of this upcoming change to the application rules as time could be running out for applicants that this rule change will affect.