States.”2 This new interpretation of “individuals” resulted in the denial by the SBA Office of Hearings and Appeals of an SBIR grant in 2003 to Cognetix, a Utah biotech company, because the company’s equity was more than 50 percent owned by private investment firms. The ruling, issued by an Administrative Law Judge, stated that venture capital firms were not “individuals,” i.e., “natural persons,” and therefore SBIR agencies could not give SBIR grants to companies in which venture capital firms had a controlling interest. The effect of this directive has thus been to exclude companies in which venture capital firms have a controlling interest.3


No empirical assessment of the likely impact of this new interpretation was made before the SBA ruling was implemented. Since then, claims about its impact have been made by both proponents and opponents, but both appear overstated. Those who support the SBA ruling predict that eliminating the new interpretation of the rule could lead to the participation of firms controlled by large venture capital firms, including venture capital arms of major industrial corporations such as General Electric or Intel, and argue that this outcome is contrary to the mission of the SBIR program. Arguing against this position, the National Institutes of Health, biotechnology companies, and the Biotechnology Industry Organization (BIO) have argued that the new eligibility requirements have a negative impact on the NIH mission and on the ability of high-technology firms to develop and commercialize promising new biomedical technologies.


To better understand the impact of the SBA exclusion of firms receiving venture funding (resulting in majority ownership), the NRC proposed that the NIH study be extended to include this empirical analysis by the NRC.4 In particular,


Access the SBA’s 2002 SBIR Policy Directive, Section 3(y)(3) at <>.


See Appendix F.


As the SBIR program approached its twentieth year of operation, the U.S. Congress requested the National Research Council (NRC) of the National Academies to “conduct a comprehensive study of how the SBIR program has stimulated technological innovation and used small businesses to meet Federal research and development needs” and to make recommendations with respect to the SBIR program. Mandated as a part of the SBIR reauthorization in late 2000, the NRC study has assessed the SBIR program as administered at the five federal agencies that together make up some 96 percent of SBIR program expenditures. The agencies, in order of program size, are the Department of Defense (DoD), the National Institutes of Health (NIH), the National Aeronautics and Space Administration

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