DEI Challenge Hits State Small Business Credit Initiative, Threatens Funding Opportunities

Takeaways

• A lawsuit seeks to invalidate a regulation underpinning eligibility for aspects of the State Small Business Credit Initiative. The SBA regulation creates a rebuttable presumption that designates racial and ethnic groups as “socially disadvantaged,” relieving those applicants from demonstrating social disadvantage.
• U.S. district courts have enjoined use of the presumption in three other federal programs, finding that it violates the Constitution’s Equal Protection Clause.
• The DOJ recently took the position that the presumption is unconstitutional in lawsuits against other federal programs.

Related links

• 13 CFR § 124.103, Who is socially disadvantaged?
• Solicitor General Letter to Congress
• Lawsuit Challenges Racial + Ethnic ‘Social Disadvantage’ Presumption in SBA and Other Federal Supplier Diversity Programs

Article

A lawsuit filed in the U.S. District Court for the Eastern District of Louisiana by Revier Technologies, Inc. and Young America Foundation (YAF) on Nov. 17, 2025, would impact those portions of the State Small Business Credit Initiative (SSBCI) that provide a rebuttable presumption of social and economic disadvantage for certain racial and ethnic groups. The Department of Treasury administers SSBCI. The statute creating SSBCI incorporates the definition of “socially and economically disadvantaged individual” from 15 U.S.C. § 637, federal procurement contracts, business grants, and cooperative agreements, and its implementing regulations.

The lawsuit seeks to invalidate the Small Business Administration (SBA) implementing regulation creating the presumption of “social disadvantage” for members of designated racial and ethnic groups. 13 C.F.R. § 124.103(b)(1). The lawsuit alleges that the presumption violates the Constitution’s Equal Protection Clause because it is based on racial classifications that do not pass the strict scrutiny test established by the U.S. Supreme Court. This challenge to the presumption aligns with a string of cases that flow from the administration’s challenge to diversity, equity, and inclusion (DEI) programs.

State Small Business Credit Initiative

SSBCI provides funding to state agencies to support small businesses and entrepreneurship in communities across the United States by offering capital and technical assistance to promote small business stability, growth, and success. The SSBCI Capital Program provides funding for state and local government equity/venture capital programs for small businesses. The SSBCI Technical Assistance Grant Program supports programs that provide legal, accounting, or financial advisory services to qualifying small businesses.

Social and Economic Disadvantage

Pursuant to 15 U.S.C. § 637(a)(5), “socially disadvantaged individuals are those who have been subjected to racial or ethnic prejudice or cultural bias because of their identity as a member of a group without regard to their individual qualities.” SBA regulations implementing the statute provide that members of designated racial and ethnic groups are rebuttably presumed to be socially disadvantaged.

Individuals who do not benefit from the presumption can demonstrate their social disadvantage by a preponderance of evidence that: (i) “at least one objective distinguishing feature that has contributed to social disadvantage, such as race, ethnic origin, gender, identifiable disability, long-term residence in an environment isolated from the mainstream of American society, or other similar causes not common to individuals who are not socially disadvantaged”; (ii) the social disadvantage is chronic and substantial; and (iii) the social disadvantage has negatively impacted their entry into or advancement in the business world.

Economic disadvantage is defined to mean the ability of an individual who is socially disadvantaged to compete in the free enterprise system has 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.

Standing

Revier asserts standing to challenge the SSBCI program because it was denied small business investment capital offered through an SSBCI program because its owner is White, did not benefit from the presumption, and was deemed ineligible for the program.

YAF asserts associational standing on behalf of members who have been denied the ability to apply for the cybersecurity fellowship on equal footing because they are White and do not qualify for the presumption.

Recent Federal Cases Found Presumption Violates Equal Protection Clause

The plaintiffs cite three recent U.S. district court cases that have found that the SBA regulatory presumption violates the Equal Protection Clause and have enjoined application of the presumption to the specific programs at issue in those cases. Revier and YAF seek invalidation of the regulation itself.

Permanent injunctions had been applied to the SBA 8(a) program in Ultima Services Corp. v. U.S. Dep’t of Agriculture, et al., No. 2:20-cv-00041 (E.D. Tenn. July 19, 2023), and the Minority Business Development Agency (MBDA) Business Center Program in Nuziard v. MBDA, No. 4:23-cv-00278 (N.D. Tex. June 5, 2023). The Biden Administration did not appeal either decision.

In January 2025, a preliminary injunction was imposed against use of the presumption with respect to the Department of Transportation’s Disadvantaged Business Enterprise (DBE) program in Mid-America Milling v. U.S. Dep’t of Transportation, No. 3:23-cv-00072 (E.D. Ky. Sept. 23, 2024). In that case, the federal government elected to forgo appeal and entered into an agreement with the plaintiffs to end the case with an admission that the presumption is unlawful. Minority business associations that had intervened in the case are seeking to continue defense of the presumption, arguing the proposed stipulation of dismissal is not a true settlement, since the federal government has simply “switched sides.” Briefing on the intervenors’ argument is scheduled through December.

In addition, the U.S. Solicitor General has formally notified Congress that DOJ has determined that the presumption is unconstitutional with respect to the DBE program and the DOJ will no longer defend it. Presumably, DOJ will take the same position with respect to the presumption as applied to other federal programs.

Next Steps

• Financial services companies that participate in state or local government programs that receive funding through SSBCI should review their agreements to determine if any incorporate the SBA social and economic disadvantage presumption or requirement.
   
• Companies with SSBCI-related agreements or programs should monitor challenges to the SBA presumption and ensure compliance with any regulatory changes.
   
• Companies should review their contracts and agreements to determine if any incorporate the SBA social disadvantage presumption. As Revier Technologies, Inc., et al. v. U.S. Small Business Administration, et al. highlights, the presumption impacts a variety of programs, including, but not limited to, federal contracts.

Jackson Lewis attorneys can assist with any aspect of compliance and answer questions regarding the law’s provisions or applicability to your business. For assistance, please contact your Jackson Lewis attorney.