111^th Congress

SBIR Reauthorization

H.R. 2647, H.R. 2965, S. 1233

Background

The Small Business Innovation Research (SBIR) program was created on July 22, 1982, to provide support to small, high-tech firms that play a role in technological advancement and to increase private-sector commercialization of innovation derived from Federal research and development (R&D). Federal agencies with extramural R&D budgets of more than $100 million are required to administer SBIR programs using an annual set-aside of 2.5 percent for small companies to conduct innovative research or R&D that has potential for commercialization and public benefit. Currently 11 departments have SBIR programs, and separate agency solicitations are issued at established times. Federal agencies with extramural R&D budgets of more than $1 billion are required to administer the Small Business Technology Transfer (STTR) program using an annual set-aside of 0.30 percent. The STTR program was created in 1992 to encourage commercialization of university and Federal laboratory R&D by small companies by providing funding for research proposals that are developed cooperatively between a small firm and a scientist in a research organization.

Phases: The SBIR grant-making process is structured in three distinct phases to achieve the program's goals: Phase I grants, currently $100,000 per award for 6 months, are feasibility studies focused on limited research aimed at establishing an idea's scientific and commercial promise; Phase II grants, currently $750,000 per award for 2 years, fund more extensive R&D to further develop the scientific merit and commercial potential of the research ideas. Phase III does not normally involve SBIR Federal funds but is the stage at which grant recipients should be obtaining additional funds from either a procurement program at an agency, private investors, or capital markets. The objective of Phase III is to move technology to the prototype stage and into the marketplace while leveraging Federal investments. The National Institutes of Health (NIH) does not fund Phase III awards.

Venture Capital: The long timeline (8-12 years or more on average) and high costs involved in turning new ideas into marketable products often require small businesses to seek outside sources of funding. Small biotechnology firms, for example, can leverage their SBIR funds by attracting venture capital funding to support breakthrough technologies in fields such as gene therapy, proteomics, and pharmaceutical development. In December 2004, the Small Business Administration, which sets the regulations and guidelines for participating agencies, issued a rule that redefined eligibility criteria to allow the participation of small business concerns in the SBIR program that are at least 51-percent owned by another small business concern (e.g., a venture capital company) that is also 51-percent owned by individuals who are citizens or permanent resident aliens of the United States. Furthermore, the small business concern must meet the size standard of 500 or fewer employees. After this program rule became effective, a number of previous SBIR awardees were deemed ineligible for future SBIR funding. (The STTR program is not affected by this rule change.)

Legislative History: The SBIR program was established under the Small Business Innovation Development Act of 1982 (P.L. 97-219). The SBIR reauthorization of 1992 (P.L. 102-564) doubled the set-aside rate to 2.5 percent for SBIR and 0.3 percent for STTR. These are the levels at which agencies are currently required to allocate funds from their total extramural R&D budgets. The subsequent reauthorization of 2000 (P.L. 106-554) again extended the program authority until September 30, 2008, for SBIR and until September 30, 2009, for STTR. The SBIR program has been extended three times since then via temporary extensions. First it was extended from September 30, 2008, through March 20, 2009 (P.L. 110-235), then through July 31, 2009 (P.L. 111-10), and most recently, through September 30, 2009 (P.L. 111-43). When next reauthorized, the two programs will be authorized at the same time with the same expiration date.

Stimulus: NIH received $10 billion in stimulus funds for fiscal years (FYs) 2009 and 2010 as part of the American Recovery and Reinvestment Act of 2009 (ARRA) (P.L. 111-5), signed by President Obama on February 17, 2009. ARRA waived the requirement of the total 2.8 percent set-aside for small businesses for the funding provided to NIH. This waiver has been a source of great concern on the part of the Members of both the House and Senate Committees on Small Business, resulting in the scheduling of a hearing specifically on the topic, which NIH was unable to attend. The issue remains contentious, even as the reauthorization bills are in conference.

House SBIR/STTR Authorizing Committees: On April 22, 2009, the House Committee on Small Business (Representative Nydia M. Velazquez [D-NY], Chair) held a hearing entitled "The Importance of Technology in an Economic Recovery." Jo Anne Goodnight, NIH Office of Extramural Research (OER) SBIR/STTR Program Coordinator, testified, along with representatives from other agencies with SBIR programs across the Federal Government. On April 23, the House Science and Technology Subcommittee on Technology and Innovation (Representative David M. Wu [D-OR], Chair) held a hearing entitled "The Role of SBIR and STTR Programs in Stimulating Innovation at Small High-Tech Businesses." Sally Rockey, Acting Director of OER, testified. Also testifying were Robert Berdahl, President of the Association of American Universities; Jim Greenwood, President and Chief Executive Officer of the Biotechnology Industry Organization; and Jere Glover, Attorney and Executive Director of the Small Business Technology Council.

Provisions of the Legislation/Impact on NIH

HOUSE REAUTHORIZATION BILL

H.R. 2965, the Enhancing Small Business Research and Innovation Act of 2009, as passed by the House, would loosen the requirements for venture capital-backed small businesses to receive funding from the SBIR and STTR programs without set-aside increases, as would the Senate reauthorization bill, S. 1233. Specifically, H.R. 2965 would provide the following criteria for determining eligibility for the SBIR and STTR programs:

• A business cannot have more than 500 employees.
• Venture capital operating company (VCOC)-backed small businesses would qualify for the program only if the VCOC does not own more than 50 percent of the small business or employees of that VCOC do not constitute a majority of the board of directors for that business.
• If the VCOC is controlled by a business with more than 500 employees, the small business would be eligible to receive funds if no more than two such VCOCs (that have more than 500 employees) back that small business, and those VCOCs do not control more than 20 percent of the small business.

Other Provisions: The House bill would also provide special consideration for small business projects that include energy-related research, rare disease-related research, transportation and infrastructure research, and nanotechnology-related research and would raise the small business award levels as follows: $250,000 (from $100,000) for participation in the Phase I level and $2 million (from $750,000) for participation in Phase II. The bill contains a short time-limited reauthorization for the SBIR/STTR programs, only through FY 2011.

SENATE REAUTHORIZATION BILL

S. 1233 includes a venture capital provision that would require NIH to award no more than 18 percent of its SBIR awards to small companies that are majority owned by venture capital companies, so long as no single venture capital company owns more than 49 percent of the business concerns (there is an 8-percent limit at the other 10 agencies). The bill would increase the SBIR set-aside from 2.5 percent to 3.5 percent over the period FY 2011-2020 and double the STTR set-aside from 0.3 percent to 0.6 percent from FY 2011 to FY 2015.

Other Provisions: S. 1233 would provide a 14-year reauthorization to 2023, increase the SBIR/STTR award levels from $100,000 to $150,000 for Phase I awards and from $750,000 to $1 million for Phase II awards, and limit awards from exceeding 50 percent above recommended award levels. There is a requirement for an NIH pilot, entitled "Accelerating Cures—NIH Pilot," which would be aimed at evaluating the NIH SBIR program, with an independent advisory board at the National Academy of Sciences whose responsibility would be to conduct periodic evaluations of the SBIR programs at each of the NIH Institutes and Centers. No more than 1 percent of the extramural budget could be used for the pilot, and it would sunset 5 years after enactment. Added as an amendment in floor action by Senators Tom Coburn (R-OK) and Russ Feingold (D-WI) was a requirement for competitive-selection procedures for the SBIR and STTR programs. It would also require each Federal agency participating in the SBIR or STTR programs to develop metrics to evaluate the effectiveness of the programs. The metrics would be "science-based and statistically driven" to reflect the mission of the agency and would include factors relating to the programs' economic impact.

Status and Outlook

H.R. 2965 was introduced by Representative Jason Altmire (D-PA) on June 19, 2009, and was passed by the House on July 8 by a vote of 386 to 41.

S. 1233 was introduced by Senator Mary Landrieu (D-LA) on June 10, 2009, and was passed by the Senate on July 13 by a voice vote. The Senate also took up H.R. 2965, vacated the contents, inserted in lieu of the House bill the full text of the Senate bill, and then passed that bill as well. It was that version which was attached, as one of a collection of amendments adopted en bloc, to H.R. 2647, the Defense Authorization bill, which is now in its own conference.

Conferees have not yet been named for the SBIR reauthorization bills, but staff-to-staff discussions have begun. Congress will begin in earnest to address this legislation when the August recess comes to a close, given the short-term continuation until only September 30.

September 2009