Regulation

§ 124.104

13 CFR Ch. I (1–1–12 Edition)

American society, not in other countries; and
(iii) Negative impact on entry into or
advancement in the business world because of the disadvantage. SBA will
consider any relevant evidence in assessing this element. In every case,
however, SBA will consider education,
employment and business history,
where applicable, to see if the totality
of circumstances shows disadvantage
in entering into or advancing in the
business world.
(A) Education. SBA considers such
factors as denial of equal access to institutions of higher education, exclusion from social and professional association with students or teachers, denial of educational honors rightfully
earned, and social patterns or pressures
which discouraged the individual from
pursuing a professional or business
education.
(B) Employment. SBA considers such
factors as unequal treatment in hiring,
promotions and other aspects of professional advancement, pay and fringe
benefits, and other terms and conditions of employment; retaliatory or
discriminatory behavior by an employer; and social patterns or pressures
which have channeled the individual
into nonprofessional or non-business
fields.
(C) Business history. SBA considers
such factors as unequal access to credit
or capital, acquisition of credit or capital under commercially unfavorable
circumstances, unequal treatment in
opportunities for government contracts
or other work, unequal treatment by
potential customers and business associates, and exclusion from business or
professional organizations.
(d) Socially disadvantaged group inclusion—(1) General. Representatives of an
identifiable group whose members believe that the group has suffered chronic racial or ethnic prejudice or cultural
bias may petition SBA to be included
as a presumptively socially disadvantaged group under paragraph (b)(1) of
this section. Upon presentation of substantial evidence that members of the
group have been subjected to racial or
ethnic prejudice or cultural bias because of their identity as group members and without regard to their individual qualities, SBA will publish a no-

tice in the FEDERAL REGISTER that it
has received and is considering such a
request, and that it will consider public
comments.
(2) Standards to be applied. In determining whether a group has made an
adequate showing that it has suffered
chronic racial or ethnic prejudice or
cultural bias for the purposes of this
section, SBA must determine that:
(i) The group has suffered prejudice,
bias, or discriminatory practices;
(ii) Those conditions have resulted in
economic deprivation for the group of
the type which Congress has found exists for the groups named in the Small
Business Act; and
(iii) Those conditions have produced
impediments in the business world for
members of the group over which they
have no control and which are not common to small business owners generally.
(3) Procedure. The notice published
under paragraph (d)(1) of this section
will authorize a specified period for the
receipt of public comments supporting
or opposing the petition for socially
disadvantaged group status. If appropriate, SBA may hold hearings. SBA
may also conduct its own research relative to the group’s petition.
(4) Decision. In making a final decision that a group should be considered
presumptively
disadvantaged,
SBA
must find that a preponderance of the
evidence demonstrates that the group
has met the standards set forth in
paragraph (d)(2) of this section based
on SBA’s consideration of the group petition, the comments from the public,
and any independent research it performs. SBA will advise the petitioners
of its final decision in writing, and publish its conclusion as a notice in the
FEDERAL REGISTER. If appropriate, SBA
will amend paragraph (b)(1) of this section to include a new group.
[63 FR 35739, June 30, 1998, as amended at 74
FR 45753, Sept. 4, 2009; 76 FR 8254, Feb. 11,
2011]

§ 124.104 Who is
advantaged?

economically

(a) General. Economically disadvantaged individuals are socially disadvantaged individuals whose ability to compete in the free enterprise system has

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Small Business Administration

§ 124.104

been impaired due to diminished capital and credit opportunities as compared to others in the same or similar
line of business who are not socially
disadvantaged.
(b) Submission of narrative and financial information. (1) Each individual
claiming economic disadvantage must
describe it in a narrative statement,
and must submit personal financial information.
(2) When married, an individual
claiming economic disadvantage must
submit separate financial information
for his or her spouse, unless the individual and the spouse are legally separated. SBA will consider a spouse’s financial situation in determining an individual’s access to credit and capital
where the spouse has a role in the business (e.g., an officer, employee or director) or has lent money to, provided
credit support to, or guaranteed a loan
of the business. SBA does not take into
consideration
community
property
laws when determining economic disadvantage.
(c) Factors to be considered. In considering diminished capital and credit opportunities, SBA will examine factors
relating to the personal financial condition of any individual claiming disadvantaged status, including income
for the past three years (including bonuses and the value of company stock
received in lieu of cash), personal net
worth, and the fair market value of all
assets, whether encumbered or not. An
individual who exceeds any one of the
thresholds set forth in this paragraph
for personal income, net worth or total
assets will generally be deemed to have
access to credit and capital and not
economically disadvantaged.
(1) Transfers within two years. (i) Except as set forth in paragraph (c)(1)(ii)
of this section, SBA will attribute to
an individual claiming disadvantaged
status any assets which that individual
has transferred to an immediate family
member, or to a trust a beneficiary of
which is an immediate family member,
for less than fair market value, within
two years prior to a concern’s application for participation in the 8(a) BD
program or within two years of a Participant’s annual program review, unless the individual claiming disadvantaged status can demonstrate that the

transfer is to or on behalf of an immediate family member for that individual’s education, medical expenses, or
some other form of essential support.
(ii) SBA will not attribute to an individual claiming disadvantaged status
any assets transferred by that individual to an immediate family member
that are consistent with the customary
recognition of special occasions, such
as birthdays, graduations, anniversaries, and retirements.
(iii) In determining an individual’s
access to capital and credit, SBA may
consider any assets that the individual
transferred within such two-year period described by paragraph (c)(1)(i) of
this section that SBA does not consider
in evaluating the individual’s assets
and net worth (e.g., transfers to charities).
(2) Net worth. For initial 8(a) BD eligibility, the net worth of an individual
claiming disadvantage must be less
than $250,000. For continued 8(a) BD
eligibility after admission to the program, net worth must be less than
$750,000. In determining such net worth,
SBA will exclude the ownership interest in the applicant or Participant and
the equity in the primary personal residence (except any portion of such equity which is attributable to excessive
withdrawals from the applicant or Participant). Exclusions for net worth purposes are not exclusions for asset valuation or access to capital and credit
purposes.
(i) A contingent liability does not reduce an individual’s net worth.
(ii) Funds invested in an Individual
Retirement Account (IRA) or other official retirement account that are unavailable to an individual until retirement age without a significant penalty
will not be considered in determining
an individual’s net worth. In order to
properly assess whether funds invested
in a retirement account may be excluded from an individual’s net worth,
the individual must provide information about the terms and restrictions
of the account to SBA and certify that
the retirement account is legitimate.
(iii) Income received from an applicant or Participant that is an S corporation, limited liability company
(LLC) or partnership will be excluded
from an individual’s net worth where

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§ 124.105

13 CFR Ch. I (1–1–12 Edition)

the applicant or Participant provides
documentary evidence demonstrating
that the income was reinvested in the
firm or used to pay taxes arising in the
normal course of operations of the
firm. Losses from the S corporation,
LLC or partnership, however, are losses
to the company only, not losses to the
individual, and cannot be used to reduce an individual’s net worth.
(iv) The personal net worth of an individual claiming to be an Alaska Native will include assets and income
from sources other than an Alaska Native Corporation and exclude any of the
following which the individual receives
from any Alaska Native Corporation:
cash (including cash dividends on stock
received from an ANC) to the extent
that it does not, in the aggregate, exceed $2,000 per individual per annum;
stock (including stock issued or distributed by an ANC as a dividend or
distribution on stock); a partnership
interest; land or an interest in land (including land or an interest in land received from an ANC as a dividend or
distribution on stock); and an interest
in a settlement trust.
(3) Personal income for the past three
years. (i) If an individual’s adjusted
gross income averaged over the three
years preceding submission of the 8(a)
application exceeds $250,000, SBA will
presume that such individual is not
economically disadvantaged. For continued 8(a) BD eligibility, SBA will
presume that an individual is not economically disadvantaged if his or her
adjusted gross income averaged over
the three preceding years exceeds
$350,000. The presumption may be rebutted by a showing that this income
level was unusual and not likely to
occur in the future, that losses commensurate with and directly related to
the earnings were suffered, or by evidence that the income is not indicative
of lack of economic disadvantage.
(ii) Income received from an applicant or Participant that is an S corporation, LLC or partnership will be
excluded from an individual’s income
where the applicant or Participant provides documentary evidence demonstrating that the income was reinvested in the firm or used to pay taxes
arising in the normal course of operations of the firm. Losses from the S

corporation, LLC or partnership, however, are losses to the company only,
not losses to the individual, and cannot
be used to reduce an individual’s personal income.
(4) Fair market value of all assets. An
individual will generally not be considered economically disadvantaged if the
fair market value of all his or her assets (including his or her primary residence and the value of the applicant/
Participant firm) exceeds $4 million for
an applicant concern and $6 million for
continued 8(a) BD eligibility. The only
assets excluded from this determination are funds excluded under paragraph (c)(2)(ii) of this section as being
invested in a qualified IRA account.
[63 FR 35739, June 30, 1998, as amended at 76
FR 8254, Feb. 11, 2011]

§ 124.105 What does it mean to be unconditionally owned by one or more
disadvantaged individuals?
An applicant or Participant must be
at least 51 percent unconditionally and
directly owned by one or more socially
and economically disadvantaged individuals who are citizens of the United
States, except for concerns owned by
Indian tribes, Alaska Native Corporations, Native Hawaiian Organizations,
or Community Development Corporations (CDCs). See § 124.3 for definition of
unconditional ownership; and §§ 124.109,
124.110, and 124.111, respectively, for
special ownership requirements for
concerns owned by Indian tribes, ANCs,
Native Hawaiian Organizations, and
CDCs.
(a) Ownership must be direct. Ownership by one or more disadvantaged individuals must be direct ownership. An
applicant or Participant owned principally by another business entity or
by a trust (including employee stock
ownership trusts) that is in turn owned
and controlled by one or more disadvantaged individuals does not meet
this requirement. However, ownership
by a trust, such as a living trust, may
be treated as the functional equivalent
of ownership by a disadvantaged individual where the trust is revocable, and
the disadvantaged individual is the
grantor, a trustee, and the sole current
beneficiary of the trust.

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