The Small Business Innovation Research Program: Reauthorization Efforts

The Small Business Innovation Research Program: Reauthorization Efforts

Order Code RS22865
Updated September 2, 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. In the Senate, S. 3362, which also
reauthorizes and amends the SBIR activity, was reported from the Committee on Small
Business and Entrepreneurship on August 22, 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, The SBIR/STTR Reauthorization Act, as passed by the House,
reauthorizes and makes several significant changes to the SBIR and STTR programs. S.
3362, The SBIR/STTR Reauthorization Act of 2008, as reported from the Senate
Committee on Small Business and Entrepreneurship, also addresses these two programs.
The following table provides a summary of the major provisions of the two bills by issue.
It is designed to highlight the differences and similarities between H.R. 5819 and S. 3362.
Comparison of H.R. 5819 and S. 3362 by Major Issue
Issue
H.R. 5819
S. 3362
Reauthorization
The termination date for the SBIR
The bill extends the SBIR program to
program is extended to September 30,
September 30, 2022, while the STTR
2010, while the STTR activity is extended
program is extended to September 30, 2023.
to September 30, 2010.
Award Levels
The level of awards made under the SBIR
Phase I SBIR and STTR awards are
and STTR programs is increased from
increased from $100,000 to $150,000 and
$100,000 to $300,000 for Phase I awards
Phase II SBIR and STTR awards are
and from $750,000 to $2,200,000 for
increased from $750,000 to $1,000,000.
Phase II awards.
SBIR Set-Aside
No similar provision.
The set-aside is increased from 2.5% in
Amounts
2009 by 0.1% per year up to 3.5% in 2019
with the following exceptions: the National
Institutes of Health (NIH) remains at 2.5%
and the increases in funding generated by
the set-aside at the Department of Defense
and the Department of Energy are not to be
used for Phase I or II awards but for
“activities that further the technology
readiness levels of technologies being
developed under Phase II awards....”
STTR Set-Aside
No similar provision.
The set-aside is increased from 0.3% to
Amounts
0.4% for 2010 through 2011; to 0.5% for
2012 through 2013; and to 0.6% from 2014
on.
Sequential
A recipient of a Phase I grant from one
A recipient of a Phase I grant from one
Awards
federal agency would be permitted to
federal agency would be permitted to apply
apply for a Phase II award from another
for a Phase II award from another agency to
agency to pursue the original work.
pursue the original work. A small business
Companies would be allowed to switch
would be allowed to switch between the
between the SBIR and STTR programs. A
SBIR and STTR programs.
small firm may apply for a Phase II award
without first obtaining and successfully
completing a Phase I grant as currently
required. Sequential Phase II awards for a
project are permitted.

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Issue
H.R. 5819
S. 3362
Majority Venture
For the SBIR and STTR programs, the bill
The bill permits NIH to award not more
Capital Owned
would allow majority venture capital
than 18% of SBIR funds to majority venture
Small Businesses
ownership in a small business if not more
capital-owned small businesses so long as
than 50% of the firm is owned by one
“...no single venture capital company owns
venture capital company and the
more than 49 percent of the small business
employees of the venture capital company
concern” upon a written determination
are not a majority of the small firm’s
provided to the Administrator of the SBA
board of directors. If the venture capital
and the Senate Committee on Small
company is controlled by a business with
Business and Entrepreneurship and the
more than 500 employees, the small
House Committee on Small Business.
business is eligible only if not more than
Allows other participating agencies to
two large venture capital companies have
award not more than 8% of SBIR funds to
ownership interest in the small firm, these
majority venture capital-owned small
large venture capital companies do not
businesses so long as “...no single venture
collectively own more than 20% of the
capital company owns more than 49 percent
small business, and the large venture
of the small business concern” upon a
capital companies “do not collaborate
written determination provided to the
with each other to exercise more control
Administrator of the SBA and the Senate
over the small business concern than they
Committee on Small Business and
could otherwise exercise individually.”
Entrepreneurship and the House Committee
on Small Business.
Outreach
The bill authorizes and makes changes to
Similar provisions.
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.
Commercializa-
To facilitate the commercialization of the
The bill provides for commercialization
tion Activities
results of the SBIR program, the bill
pilot programs for Phase II SBIR and STTR
requires agencies to establish procedures
technologies in DOD and the civilian
to encourage SBIR awardees to develop
agencies. Encourages SBIR and STTR
partnerships with other organizations,
awards to small businesses that work with
including prime contractors, business
federal laboratories or are involved in
incubators, venture capital companies, and
cooperative research and development
large business to assist them in moving to
agreements (CRADAs).
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.
Areas of
Agencies are directed to focus on research
Agencies are encouraged to make SBIR and
Concentration
in energy, rare diseases, transportation,
STTR awards in nanotechnology and R&D
and nanotechnology.
related to cures for disease.
Oversight
Agencies that administer SBIR grants of
The bill provides for the creation and
$50,000,000 or more must establish a
maintenance of data bases collecting
SBIR Advisory Board comprised of
relevant information on the SBIR and STTR
agency employees, private sector
programs for use by both the government
representatives, veteran small business
and the public sector.
owners, and others to make
recommendations on programmatic topics.
An annual report is to be required.

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Issues for Consideration
Perhaps the most contentious issue in the reauthorization 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 (H.Rept. 97-349, Part IV) to accompany the House bill that
became the basis for the legislation, was
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.
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 an April 2006 report by the
Government Accountability Office (GAO-06-565),
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.
Both H.R. 5819 and S. 3362 alter the eligibility requirements regarding 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.
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 investors while favoring the biotechnology
and venture capital sectors.
Under the House-passed bill, the set-aside for the SBIR and STTR programs remains
at its current level. However, the Senate bill increases the amount of the set-aside for the

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SBIR program by 0.1% each year until it reaches 3.5% in 2019 (with the exception of the
set-aside for the National Institutes of Health which remains at 2.5% and limits on use of
DOD and DOE funding increases to “activities that further the technology readiness levels
of technologies being developed under Phase II awards....” The set-aside for the STTR
program also is increased: from 0.3% to 0.4% for 2010 through 2011; to 0.5% for 2012
through 2013; and to 0.6% from 2014 on.
Both bills increase the amount of individual SBIR and STTR Phase I and Phase II
awards that may be made. 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, particularly under H.R. 5819 which does not increase the amount of the set-
aside.
In addition to permitting larger individual awards, the bills provide 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. H.R.
5819 includes preferences for R&D in energy, rare diseases, transportation, 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. S. 3362 encourages awards in
R&D associated with cures for rare diseases and nanotechnology.
The existing phased approach of the SBIR program is altered by the provisions of
the reauthorization bills 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. Under H.R. 5819, 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, both bills would increase
outreach to small firms and include other efforts to encourage and expand participation
in the SBIR and STTR programs.
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.