On September 22, the Senate passed the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) Extension Act of 2022. As it heads to the House of Representatives, government contractors in these programs should be weary of various changes that would significantly impact both programs, if passed. Particularly, the bill cracks down on foreign investment and affiliation in SBIR/STTR participants, as well as increasing performance standards for firms considered “SBIR Mills,” the term given to small businesses receiving a significant number of awards under Phase I and II of the SBIR program but fail to commercialize anything under Phase III. Below are two major changes that, if enacted, could severely limit SBIR/STTR applicants’ ability to win awards.

Limiting Foreign Risks through Due Diligence and Disclosure Obligations

The bill would implement a due diligence program to assess security risks presented by small businesses affiliated with foreign interests. These due diligence programs will be required to assess a small business’ cybersecurity practices, patent analysis, and foreign ownership, including any financial ties and obligations to a foreign country, person, or entity.

Each offeror submitting a proposal or application under either the SBIR or STTR, will be required to disclose:

  • the identity of all owners and “covered individuals” who are a party to any foreign talent recruitment program of any foreign country of concern (China, Russia, North Korean, Iran, or any other designated by the Secretary of State);
  • the existence of any joint venture or subsidiary based in, funded by, or has a foreign affiliation with any foreign country of concern;
  • any current or pending contractual/financial obligation or other agreement with an enterprise owned by a foreign state or foreign entity;
  • whether the small business is wholly owned in a foreign country of concern;
  • the percentage of venture capital or institutional investment by an entity with a general partner or individual holding a leadership role in such entity who has a foreign affiliation with any foreign country of concern;
  • any technology licensing or IP sales to a foreign country of concern within the five years preceding proposal submission; and
  • any related foreign business entity.

After review of the above disclosures, contracting agencies may request supporting documentation to ensure the accuracy of the disclosure. Indeed, agencies will have the authority to deny an award to a small business contractor if their disclosures interfere with the federal agencies’ activities, present concerns about conflicts of interests, were not properly disclosed to the agency, or pose a risk to national security. Particularly significant in the merger and acquisition context, awardees will have an obligation to report any change in ownership, change in entity structure, or other substantial change in the circumstances of their business that may pose a risk to national security.

Increased Minimum Performance Standards for Experienced Firms

Certain measurements are in place to track the progress of firms from Phase I to Phase II. Currently, to be eligible to submit a proposal for a new Phase I award, SBIR/STTR Phase I applicants who received 21 or more Phase I awards over the past five fiscal years are required to receive an average of one Phase II award for every four Phase I awards during the most recent five-year time period. The bill proposes doubling these standards for firms receiving even more Phase I awards. Those receiving 50 or more Phase I awards during the previous five fiscal years will be required to have an average of at least two Phase II awards per four Phase I awards. Failure to do so will limit the amount of Phase I and Phase II awards a small business can receive to 20 for one year after the date the agency makes the sub-standard performance determination.

Furthermore, to track progress of firms from Phase II to Phase III, currently, firms that won more than 15 Phase II awards during the previous five fiscal years are required to have an average of $100,000 of sales and/or investments per Phase II award received. Like above, the bill will increase this performance requirement. For businesses receiving more than 50 Phase II awards during the previous five fiscal years, agencies will require an average of $250,000 in aggregate sales and investments per Phase II award are received during that five-year period. The required aggregate sales will be increased to $450,000 if a small business receives more than 100 Phase II awards in the previous five fiscal years. Failure to meet this standard will limit the amount of Phase I and Phase II awards a small business can receive to 20 for one year after the date the agency makes this determination. Finally, firms will be required to submit supporting documentation of these “covered sales” to the agency to ensure firms are meeting the increased standards.

These changes signal Congress’s intent to provide greater oversight for the SBIR/STTR programs due to the increased attention received by the SBIR Mills. The disclosure requirements are extensive and will require applicants to have all necessary documentation to back them up at the time of offer submission. Failure to comply with the disclosures, or failure to meet the minimum performance standards, will expose any small business SBIR/STTR applicant to the possibility of losing out on large R&D funding opportunities.

If approved, PilieroMazza plans to release a subsequent client alert to nail down the final requirements and changes to the SBIR/STTR programs. If you have questions about the proposed changes to the SBIR/STTR programs, please contact Cy Alba, the author of this client alert, or another member of PilieroMazza’s Government Contracts Group. Special thanks to Daniel Figuenick for his assistance with this client alert.