How small-business issues are shaping politics and policy.The Agenda
When Congress passed a law late last year reauthorizing the Small Business Innovation Research program after a long fight, many small-business advocates weren?t exactly thrilled ? the new law made controversial changes that explicitly opened the program to companies backed by venture capital and other investment funds. But these advocates were willing to accept the changes because the new law would bring stability to the program for five years. Now the Small Business Administration has stirred fresh outrage by proposing new rules that allow foreign companies into the program for the first time and create a loophole that could open it to big businesses as well.
The changes would be adopted as part of proposed regulations putting the law into effect. But the changes seem to run contrary to the explicit intent of Congress, which said in the law that it expected the S.B.A. to draft regulations that ?preserve and maintain the integrity of the S.B.I.R. program as a program for small-business concerns in the United States by prohibiting large businesses or large entities or foreign-owned businesses or foreign-owned entities from participation in the program.?
The S.B.I.R. program directs 11 government agencies that spend more than $100 million on research grants to set aside 2.5 percent of that pool for companies with fewer than 500 employees ? companies like?Qualcomm and Symantec, both of which won grants in their formative years. In the 30 years the program has been on the books, it has won a reputation as an effective tool for spurring technological advances. In 2010, S.B.I.R. awards totaled $2.2 billion, according to the S.B.A.
Under the new law, a small business in which a group of funds together own a majority stake can now compete for up to 25 percent of S.B.I.R. grants from the National Institutes of Health, the National Science Foundation and the Department of Energy, and up to 15 percent at the eight other agencies. The law directed the S.B.A. to write rules that would define eligibility requirements specifically for fund-controlled companies applying for an S.B.I.R. grant under the new law?s terms.
Instead, the S.B.A. rewrote the eligibility requirements for all applicants competing for all S.B.I.R. grants, and also extended them to a separate, smaller initiative, the Small Business Technology Transfer program. Where the existing rules require that an applicant to either program be majority-owned by an American person or company, or a permanent resident, the proposed new rules eliminate that requirement by creating a new type of eligible company: the ?domestic business concern.? A domestic business concern must be organized in the United States and primarily operate here, but it need not be majority-owned by American citizens or permanent residents. The S.B.A. said that it considered making ownership requirements part of the definition of a domestic business concern but concluded that this would place ?an extra burden on the small business and an added complexity that is not necessary.?
The proposed changes also loosen the rules defining when a minority investor effectively controls a company ? rules that help the S.B.A. determine whether an applicant is a small business. For the S.B.I.R. program, the S.B.A. adds up the employees at all of a business? affiliates when calculating its size, and a company that controls another is deemed an affiliate. Currently, when no owner has a majority stake, the S.B.A. determines who controls the company on a case-by-case basis. The proposal would establish a clear-cut rule: if there?s no majority stake, the board controls the company. In most cases, the company will be deemed not to have any affiliates that might make it too big for a grant.
This, says Bob Clarkson, a lawyer in the Palo Alto, Calif., office of the law firm Jones Day, opens the door to big companies getting grants intended for small businesses. Mr. Clarkson points out that a minority shareholder with a stake as small as 25 percent can very easily control a board even if it does not formally control a majority of the seats, especially when its holdings dwarf the other shareholders. ?In a widely dispersed group of stockholders, lots of times, not all the stockholders vote,? he said. ?And it?s not that hard for the stockholder to find two or three other stockholders to line up with them.? In other words, if the new rules are adopted, large companies could effectively win S.B.I.R. grants through their smaller, unacknowledged, affiliates.
?Within 30 days of enactment, there will be articles telling big businesses and foreign companies how to get around the rules,? said Jere Glover, executive director of the Small Business Technology Council, an advocacy group affiliated with the National Small Business Association, and a top S.B.A. official in the Clinton administration.
The S.B.A. official responsible for drafting the regulations, Sean Greene, said in an interview the agency fully intended to comply with the wishes of Congress. But he said that not expanding the new rules to the entire program would give an edge to companies majority-owned by investment funds.
As for domestic business concerns, Mr. Greene said the agency had to make an exception to the ban on majority foreign ownership so funds with overseas investors could participate under the new law. ?What?s very clear in all of this is that the people actually receiving the awards have to be U.S.-based businesses doing the bulk of the research in the United States,? Mr. Greene said. Moreover, there?s nothing to keep an American-owned grant winner from licensing its government-funded invention to a foreign manufacturer.
But Mr. Glover said that if foreign-owned or big businesses did get into the program, it would do more damage than simply cheating legitimate small companies out of grant opportunities ? it could cast doubt on the program?s integrity. ?My worst nightmare is if a reauthorization fight occurs again, and some good reporter finds one or two examples of a foreign-owned firm taking millions of federal R&D dollars, developing a technology and taking the product back to their country of origin to manufacture the product, and create jobs overseas, that will hurt the reputation of the program,? he said. ?Likewise, when you allow big business to participate, that will also leave a black mark on the program.?
Mr. Glover said that should the rules allowing foreign-owned and big companies into the program become final, they would be vulnerable to a legal challenge. But, he said, he believes that it is ?inconceivable? that S.B.A. and the White House will let that happen. And in fact, several times in a long conversation, the S.B.A.?s Mr. Greene emphasized that these are proposed rules ? and that the agency was eager for feedback from interested parties. ?If we missed anything, if this is wrong, identify your concerns,? he said. ?But more importantly, give us concrete, specific input on how we should fix it.? Interested parties have until July 16 ? Monday ? to submit a comment.
The S.B.A. is required to issue final regulations by the end of the year.
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