Order Code RS22865
April 29, 2008
The Small Business Innovation Research
Program: Reauthorization Efforts
Wendy H. Schacht
Specialist in Science and Technology Policy
Resources, Science, and Industry Division
Summary
The Small Business Innovation Development Act of 1982, P.L. 97-219, created
Small Business Innovation Research (SBIR) programs within the major federal research
and development (R&D) agencies. This effort was intended to increase participation of
small innovative companies in federally funded R&D. Government agencies with
extramural R&D budgets of $100 million or more are required to set aside a portion of
these funds to support research and development in small businesses through the SBIR
program. The original act has been extended several times and is currently scheduled
to terminate on September 30, 2008. A bill to reauthorize and amend the program, H.R.
5819, passed the House on April 23, 2008.
Description of the Current Program
Congress has demonstrated an ongoing interest in the small business sector.
Addressing issues related to economic growth and competitiveness, special consideration
has been given to small, high tech firms for several reasons including some data that
indicate such companies tend to be highly innovative, play a significant role in
technological advancement, and contribute to the high standard of living in the United
States. Such was the rationale behind legislation creating the Small Business Innovation
Research (SBIR) program, an effort to increase that portion of the federal research and
development (R&D) budget provided to small enterprises for work associated with the
mission responsibilities of government departments and agencies. Believing that small
companies were underrepresented in government R&D activities, P.L. 97-219, as
amended, established agency SBIR programs to guarantee this sector a portion of the
government’s research and development budget to compensate for what was viewed as
a federal contracting preference for large corporations.

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Current law requires that every federal department with an extramural R&D budget
of $100 million or more establish and operate a SBIR program.1 A set percentage of that
agency’s extramural research and development budget2 — originally at 1.25%, now at
2.5% — is to be used to support mission-related work in small companies. To be eligible
to compete in the program, a company must be independently owned and operated; not
dominant in the field of research proposed; for profit; the employer of 500 or fewer
people; the primary employer of the principal investigator; and at least 51% owned by
one or more U.S. citizens or lawfully admitted permanent resident aliens. A rule change,
effective January 3, 2005, permits subsidiaries of SBIR-eligible companies to participate
as long as the parent company meets all SBIR requirements.
Agency SBIR efforts involve a three-phase activity. In the first phase, awards up to
$100,000 (for six months) are provided to evaluate a concept’s scientific or technical
merit and feasibility. The project must be of interest to and coincide with the mission of
the supporting organization. Projects that demonstrate potential after the initial endeavor
may compete for Phase II awards of up to $750,000 (lasting one-two years) to perform the
principal R&D. Phase III funding, directed at the commercialization of the product or
process, is expected to be generated in the private sector. Federal dollars, but not SBIR
funds, may be used if the government perceives that the final technology or technique will
meet public needs. P.L. 102-564 directed agencies to weigh commercial potential as an
additional factor in evaluating SBIR proposals.
As of FY2006, 11 departments have SBIR programs including the Departments of
Agriculture, Commerce, Defense (DOD), Education, Energy, Health and Human Services,
Homeland Security, and Transportation; the Environmental Protection Agency; the
National Aeronautics and Space Administration (NASA); and the National Science
Foundation (NSF). Each agency’s SBIR activity reflects that organization’s management
style. Individual departments select R&D interests, administer program operations, and
control financial support. Funding may be disbursed in the form of contracts, grants, or
cooperative agreements. Separate agency solicitations are issued at established times.
The Small Business Administration (SBA) created broad policy and guidelines under
which individual departments operate SBIR programs. The agency monitors and reports
to Congress on the conduct of the separate departmental activities.
A pilot effort to encourage commercialization of university and federal laboratory
R&D by small companies was created by P.L. 102-564 and reauthorized several times
through FY2009. The Small Business Technology Transfer program (STTR) provides
funding for research proposals that are developed and executed cooperatively between a
small firm and a scientist in a research organization and fall under the mission
requirements of the federal funding agency. Up to $100,000 in Phase I financing is
available for one year; Phase II awards of up to $750,000 may be made for two years.
Currently funded by a set-aside of 0.3% of the extramural R&D budget of departments
1 For a more detailed discussion of the current SBIR program see CRS Report 96-402, Small
Business Innovation Research Program, by Wendy H. Schacht.
2 It should be noted that P.L. 97-219 excluded appropriated funds for defense programs in the
Department of Energy from that agency’s extramural R&D calculations.

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that spend over $1 billion per year on this effort, the Departments of Energy, Defense, and
Health and Human Services, NASA, and NSF participate in the STTR program.
Reauthorization Legislation
H.R. 5819, a bill that would reauthorize and make several significant changes to the
SBIR and STTR programs, passed the House on April 23, 2008.3 Among these changes
are:
! The termination date for the SBIR program is extended from September
30, 2008, to September 30, 2010, while the STTR activity is reauthorized
through September 30, 2010, rather than the current sunset date of
September 30, 2009.
! The bill increases the level of awards made under the SBIR and STTR
programs from $100,000 to $300,000 for Phase I awards and from
$750,000 to $2,200,000 for Phase II awards.
! A recipient of a Phase I grant from one federal agency would be
permitted to apply for a Phase II award from another agency to pursue the
original work. A small business would be allowed to switch between the
SBIR and STTR programs. In addition, a small company may apply for
a Phase II award without first obtaining and successfully completing a
Phase I grant as currently required. The bill also permits sequential
Phase II awards for a project.
! For the SBIR and STTR programs, H.R. 5819 would allow majority
venture capital ownership in a small business if not more than 50% of the
firm is owned by one venture capital company and the employees of the
venture capital company are not a majority of the small firm’s board of
directors. If the venture capital company is controlled by a business with
more than 500 employees, the small business is eligible only if not more
than two large venture capital companies have ownership interest in the
small firm, these large venture capital companies do not collectively own
more than 20% of the small business, and the large venture capital
companies “do not collaborate with each other to exercise more control
over the small business concern than they could otherwise exercise
individually.”
! While agencies are still permitted to create their own programs and
identify the technologies of interest, the bill requires that solicitations be
tendered at least twice a year and that final decisions on awards be made
no later than 90 days after the close of the solicitation (although this may
be extended to 180 days upon recommendation of the SBIR Advisory
Board).
3 H.Res. 1125, passed by the House on April 23, 2008, allowed for consideration of H.R. 5819.

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! Agencies are directed to focus on certain research areas for “special
consideration” including energy-related work, R&D in the area of rare
diseases, transportation-related topics, and nanotechnology.
! The bill provides a preference for SBIR and STTR applicants from rural
areas, areas that have lost a major source of employment, veterans,
companies that may make a contribution to energy efficiency, and
companies with primary business operations in the United States.
! The award of grants to aliens unlawfully in the United States is
prohibited as is the award of grants to companies that knowingly hire,
recruit, for refer for employment an unauthorized alien.
! The bill mandates that each agency that administers $50,000,000 or more
in SBIR grants establish a SBIR Advisory Board comprised of agency
employees, private sector representatives, veteran small business owners,
and others deemed appropriate. The Advisory Board is to make
recommendations to the agency on programmatic topics including,
among other things, mechanisms to encourage a broad range of
applicants and commercialization efforts. An annual report is to be
required.
! To facilitate the commercialization of the results of the SBIR program,
the bill requires agencies to establish procedures to encourage SBIR
awardees to develop partnerships with other organizations, including
prime contractors, business incubators, venture capital companies, and
large business to assist them in moving to Phase III. “Express authority”
is provided to agencies for development of “fast track” programs to end
time delays between completion of Phase I and the award of Phase II
grants. Agencies are required to implement a commercialization program
to assist SBIR awardees in Phase III. A Minority Institution Pilot
program is created to increase the number of SBIR and STTR
applications from minority-owned small businesses.
! The bill reauthorizes and makes changes to the Federal and State
Technology Partnership (FAST) program which provides grants to
organizations to provide outreach designed to encourage increased
participation in the SBIR program.
Issues for Consideration
Perhaps the most contentious issue in H.R. 5819, as passed by the House, is that of
the level of small business ownership by venture capital companies and eligibility under
the SBIR and STTR programs. The original legislation establishing the SBIR program
required that small firms must be at least 51% owned by an individual or individuals.
Venture capital investment was permitted, and encouraged, but limited to 49% ownership
interest. The intent of providing federal grant money, as explained in the House Science
and Technology Committee report to accompany the House bill that became the basis for
the legislation, was

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to provide seed capital to small, high technology firms at the early, high risk stage of
initial concept development. Funds provided ... would compensate for what has been
described as a lack of investment capital for small businesses.... Funds provided under
the SBIR program would be used ... to cover early development costs for small firms,
providing early risk capital which is necessary for the procurement of follow-up
support from the private sector.4
However, the issue of venture capital ownership has come to the attention of
Congress as the nature of venture capital investment and R&D performance has changed
since the legislation was initially enacted in 1982. Recently, questions were raised as to
whether small companies with majority ownership by venture capital companies met the
eligibility requirements of the SBIR program. According to the Government
Accountability Office (GAO),
in 2001, an SBA administrative law judge issued a decision clarifying that the terms
“individuals” and “citizens” in the SBIR criteria meant only natural persons, not
entities such as corporations.... Then in 2003, the same SBA administrative law judge
issued a decision stating that venture capital firms could not be considered individuals
for the purpose of satisfying the ownership criteria for the program.5
H.R. 5819 alters the eligibility requirements to permit majority venture capital
ownership of small firms in the SBIR and STTR program. Proponents of this change
maintain that, particularly in the biotechnology sector, the most innovative companies are
not able to use these programs because they do not meet this ownership criteria. They
argue that because of the high cost of biotechnology R&D, large venture capital
investments are often a necessity for many of these firms. By excluding such companies
from the SBIR and STTR programs, advocates maintain that the pool of applicants for
participation in the effort, specifically at the National Institutes of Health, is decreasing
with detrimental effects to the health and strength of the U.S. economy.6
Opponents of altering the eligibility requirements argue that the program is designed
to provide financial assistance where venture capital is not available. These experts assert
that the program’s objective is to bring new concepts to the point where private sector
investment is feasible. However, they claim that the changes in the bill associated with
venture capital majority ownership take federal support away from actual small businesses
and place government funds into the hands of “wealthy investors”7 while being
4 House Committee on Science and Technology, Small Business Innovation Development Act,
House Rept. 97-349, Part IV, 97th Congress, 2d Session, March 16, 1982, 16.
5 U.S. Government Accountability Office, Small Business Innovation Research: Information on
Awards Made by NIH and DoD in Fiscal Years 2001 through 2004, GAO-06-565, April 2006,
12.
6 October 18, 2007 letter to the Chairman and Ranking Member of the Senate Committee on
Small Business and Entrepreneurship, House Committee on Small Business, and House
Committee on Science and Technology by various health-related advocacy organizations
available at [http://bio.org/images/Gmail/SBIR_OCT.pdf].
7 American Small Business League, Anti-Small Business Bill Backed by Venture Capitalist Loby
Moves Through House in Record Time, April 22, 2008, available at
[http://www.asbl.com/showmedia.php?id=1025].

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“... favorable to the biotechnology and venture capital communities and [are] at odds with
the interests of small businesses.”8
H.R. 5819 also increases the amount of individual SBIR and STTR Phase I and
Phase II awards that may be made while keeping the amount of the set-asides constant.
Raising the upward limit of the permitted awards appears to reflect a recognition that the
performance of research and development has become increasingly expensive over the 25
years since passage of the original legislation. However, this may result in fewer awards
available to small firms through these two programs.
In addition to permitting larger individual awards, H.R. 5819 provides more
congressional direction to the participating agencies as to topics for inclusion in program
solicitations and to the characteristics to be considered during the selection process. The
bill includes preferences for R&D related to energy, rare diseases, transportation-related
topics, and nanotechnology. Companies in rural areas and those located in areas that have
lost a major industry are to be given special consideration, as are small firms owned by
veterans, those that are expected to make a contribution to energy efficiency, and those
that have their primary business operations in the United States.
The existing phased approach of the SBIR program is altered by the provisions of
the House-passed reauthorization bill and may provide more flexibility for applicants and
grantees. Award recipients may switch between the SBIR and STTR programs and
among programs at different agencies. The sequential nature of the current program,
where only companies that successfully completed Phase I could apply for Phase II, would
no longer be the case as applicants would be able to apply for Phase II awards without
going through the initial Phase I process. In addition, there would be increased outreach
to small firms to encourage participation, more funding to “fast track” successful projects
from Phase I to Phase II without a long time lag within which financing would not be
available, and two or more yearly solicitations to make participation more attractive to
small companies taking into consideration their budget and research cycles.
As Congress considers the possible reauthorization of the SBIR and STTR programs,
and any possible changes in program operation, these and other issues may be explored.
8 National Small Business Association, SBIR Bill Moves to the House Floor, April 23, 2008,
available at [http://www.nsba.biz/content/1765.shtml].

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