The Small Business Innovation Research (SBIR) and Small Business Technology Transfer (SSTR) Extension Act of 2022 was enacted into law on September 30. The Act reauthorizes the SBIR/STTR programs until 2025. The reauthorization is both crucial for current participants, and aspiring small businesses wishing to conduct government-funded research and development (R&D). Small businesses currently participating, or considering submitting a proposal under either program, must be aware of the new program changes, their effective dates, and the potential consequences of noncompliance. PilieroMazza recaps and analyzes below compliance obligations for small business government contractors seeking to bid for and maintain contracts under SBIR/STTR programs.
Preventing Foreign Adversaries from Exploiting U.S. Technologies
The Act will require the head of each federal agency, with an SBIR/STTR program, to establish and implement a due diligence program to assess an offeror’s security risks within 270 days from enactment. The due diligence programs are intended to curb the exploitation of the programs by foreign adversaries, such as China, through shell companies, planted government researchers, or state-sponsored talent programs.
Due diligence programs will assess the “cybersecurity practices, patent analysis, employee analysis, and foreign ownership” of all small businesses seeking an award. The financial ties of offerors—including surety, equity, and debt obligations—will be closely scrutinized to determine if they relate or connect to any foreign country, foreign person, or foreign entity. This review is broader than the disclosures below, which generally only apply if the small business offeror is related or has a connection to a foreign country of concern (China, North Korea, Russia, Iran, or any other country designated by the Secretary of State). In addition, agencies will utilize open-source analysis and analytical tools to determine whether the below disclosures add further risks. In sum, these due diligence programs are meant to create stronger safeguards to assess security risks and prevent bad actors from influencing government-funded R&D.
Mandatory Disclosures of Connections and Relationships to Foreign Countries
Effective immediately, small businesses submitting a proposal or application under the SBIR/STTR programs will be required to make certain disclosures. It is important to pay close attention to the language used for each disclosure, as some say, “foreign country of concern” while others more broadly state “foreign state,” “foreign entity,” or “foreign business entity.” Disclosures include:
- the identity of all owners and “covered individuals” who are a party to any foreign talent recruitment program from a foreign country of concern;
- 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.
Answering in the affirmative to any one of these disclosures may give the agency the necessary justification to remove your proposal or application from consideration. In the event you answer “yes” to having a contractual obligation, financial obligation, or other agreement (i.e., joint venture arrangement) with an enterprise owned by a foreign state or any foreign entity during the previous five years preceding proposal submission, the agency will likely require supporting documentation to assess the risks associated with the foreign state or entity. Thus, it will be a best practice to have these documents on hand and ready upon request. Failure to provide such documents may result in the agency removing your offer from the competition. Agencies will have discretion as to whether an offeror should be eliminated from consideration regarding the above disclosures. Significantly, the Act also provides that an offeror will be automatically deemed ineligible for award if an Agency finds the offeror:
- (i) has an owner or covered individual that is party to a malign foreign talent recruitment program; (ii) has a business entity, parent company, or subsidiary located in a foreign country of concern; or (iii) has an owner or covered individual with a foreign affiliation to a research institution located in a foreign country of concern and
- those relationships: (i) interfere with the capacity for activities supported by the federal agency; (ii) create duplication with activities supported by the federal agency; (iii) present concerns about conflicts of interest; (iv) were not appropriately disclosed to the federal agency; (v) violate federal law or terms and conditions of the federal agency; or (vi) pose a risk to national security.
These disclosures do not stop after the proposal/award stage. The Act requires that small business participants have to repay all amounts received from an award if it makes a material misstatement that poses a risk to national security or there is a change in ownership, entity structure, or substantial change in circumstances that would be a risk to national security. While performing under either program, if a previous answer to the disclosure changes, participants will have an affirmative duty to report that change to the agency and the Small Business Administration. As mentioned previously, these disclosures will have a great impact on mergers and acquisitions for participants in the SBIR/STTR programs.
New Minimum Performance Standards for Experienced Firms
Certain measurements are currently in place to track the progress of firms from Phase I to Phase II, as well as from Phase II to Phase III. New minimum performance standards, and limits for those firms who are unable to meet them, will go into effect on April 23, 2023, in an effort to eliminate participation of SBIR mills. As of now, 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 Act will now double these standards for firms receiving even more Phase I awards. Those receiving 50 or more Phase I awards during the previous five fiscal years are now 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 for each Phase II award received. The Act now increases this performance requirement. For businesses receiving more than 50 Phase II awards during the previous five fiscal years, it is now required that a firm receives an average of $250,000 in aggregate sales and investments per Phase II award during that five-year period. The required aggregate sales were 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. Further, firms are now going to be required to submit supporting documentation for these “covered sales” to ensure firms are meeting the increased standards. Finally, small businesses required to meet the increased performance standards will not be able to meet them by obtaining patents.
It is imperative that small business participants in the SBIR/STTR programs understand these changes, the new reporting obligations, and the dates of when compliance begins. The due diligence programs will be established and implemented by all applicable federal agencies within the next 270 days. Offerors under either program would be wise to begin forming their own due diligence procedures to comply as closely with the Act’s requirements. It is also possible that individual agencies will have stricter requirements, so be sure to review their policies when released. The disclosure obligations are effective immediately and thus, small businesses participating in either program should ensure they know the answers to all questions and have supporting documentation when necessary. Failure to provide correct statements will allow an agency to remove a firm from consideration, or, if it finds out a firm made a misstatement, will require the firm to repay all awarded funds back to the agency. In closing, small business participants should know there may be more upcoming developments, as Congresswoman Velasquez and others hinted during a debate that although the Act will prove “vital to thousands of small businesses,” it does not include “everything we wanted to accomplish during this reauthorization.”
If you have questions regarding the final requirements 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.