On March 26, 2018, the U.S. Small Business Administration (SBA) issued a direct final rule that changed the wording of 13 C.F.R. § 126.200(b)(1) to allow indirect ownership by U.S. citizens of companies in the HUBZone program. The stated purpose of the rule change is to align more accurately the rule with the underlying statutory authority. Prior to this change the HUBZone rules required that a HUBZone company be “unconditionally and directly owned” by U.S. citizens. The rule took effect on May 25, 2018.

In the direct final rule, SBA noted that “[d]irect ownership is not statutorily mandated” by the statutes governing the HUBZone program and stated its belief that “the purposes of the HUBZone program—capital infusion in underutilized geographic areas and employment of individuals living in those areas—may be achieved whether ownership by U.S. citizens is direct or indirect.” SBA went on to discuss the background of the HUBZone program and why the concerns with ownership in the HUBZone program were different than those related to SBA’s other currently active socioeconomic programs:

…SBA’s other currently active socioeconomic programs (including the 8(a) BD program, the WOSB small business program, and the SDVO small business program) are intended to assist the business development of small concerns owned and controlled by certain individuals, so requiring direct ownership for these programs is consistent with their purposes. The HUBZone program differs in that the program’s goals do not center on the socioeconomic status of the SBC owner but rather the location of the business and the residence of its employees. This direct final rule deletes the requirement that ownership by United States citizens in the HUBZone program must be direct, and instead it merely copies the statutory requirement that a HUBZone small business concern must be at least 51% owned and controlled by United States citizens.

This sensible rule change will allow greater flexibility for U.S. citizens wishing to invest in a HUBZone concern to utilize holding companies and other ownership vehicles that are advantageous from an estate planning, business planning, limited liability, and/or tax perspective. Additionally, the rule change may result in a broadening of the investor community, as it will now be possible for smaller private equity or venture capital funds to invest in a HUBZone company. Of course, ownership by an investment fund has affiliation concerns that must be considered before any actual investment is made. Our government contracting and corporate attorneys are available to provide assistance with HUBZone eligibility, affiliation concerns, and any other questions you may have as you consider applying for the HUBZone program or investing in a HUBZone entity.

As an aside, this rule change does not apply to HUBZone companies owned by Indian Tribal Governments, Alaska Native Corporations, Native Hawaiian Organizations, Community Development Corporations, and small agricultural cooperatives, which have separate requirements governing their ownership of a HUBZone concern.

About the Author: Jonathan Bush is counsel with PilieroMazza in the Business & Transactions Law Group. He may be reached at [email protected].