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SBA 8(a) Interpretation of 70 percent Rule changed by OHA Appeal

In order for a company to become 8(a) certified, one of the requirements that must be met is to prove that the firm has economic independence (identity of interest) from other businesses or persons. Therefore, one of the largest roadblocks for a firm meeting the 2 year criteria is proving independence and that the firm is not in violation of the 70% rule. The 70% rule prevents and 8(a) applicant firm from having more than 70% of its revenue from a single client. From an 8(a) consultants standpoint historically meeting the 70% rule is a challenge for consulting and IT firms, as these firms are often likely to have a single large client.

Prior Ruling: Faison Office Products, LLC (2007) Ruling
“…I do hold, as a matter of law, that when one concern depends on another for 70% or more of its revenue, that the concern is economically dependent on the other. Given the high probative value of this kind of evidence, the only exception to this holding would be if the dependent concern could prove, by clear and convincing evidence, that its interests are separate from the other concern…”

Updated Ruling: OBXtek, Inc. (2013) Ruling
…while the three year period was properly used to determine Appellant’s annual receipts, the assessment of whether Appellant was economically dependent upon MircoTech should have been conducted as of the self-certification date of February 1, 2012 and taken into account the relationship between Appellant and MicroTech as of that date….

In the past the SBA’s procedure for dealing with the 70% rule has been to gather the firm’s revenue for the past 12 months as of the date of the application process. Review the invoices and determine if by ratio one client is greater than 70%. If the firm was close, for example at 68% with a single client then the SBA would go back the three years to make the determination. With the OBXtek, Inc. ruling the 8(a) applicant need be in compliance on the date the firm self certifies as a small business, which for all intents and purposes would be the date the firm submits its 8(a) application.

In all practicality what we are seeing is the SBA is now reviewing invoices going back three months from the application date. This is a shorter timeframe than going back a year or three years which makes complying with the 70% rule easier and quicker to resolve than it was in the past.

If your firm previously had a problem with the 70% rule and this situation has been recently been resolved now is a good time to take another look at an 8(a) certification.