On May 7, 2026, the DOW published a proposed rule that, if implemented as-is, will fundamentally change how small businesses handle foreign investment and supply chain vetting. The proposed rule amends the DFARS to extend Foreign Ownership, Control, or Influence (FOCI) disclosure and mitigation requirements to unclassified defense contracts and subcontracts valued at more than $5 million.

Historically, navigating the FOCI process was a burden reserved almost exclusively for contractors holding facility security clearances for classified work. By extending this to the unclassified space, the DOW expects to pull approximately 37,740 entities—including over 21,500 small businesses—into the FOCI regulatory framework for the first time. This expansion is projected to increase the Defense Counterintelligence and Security Agency's (DCSA) annual caseload from roughly 2,000 to a staggering 41,000 cases, bringing an estimated $200 billion in defense acquisitions under new scrutiny.

Under this new framework, covered contractors and subcontractors at every tier would be required to disclose their beneficial ownership and FOCI status to the DCSA via the National Industrial Security System (NISS) using a Standard Form (SF) 328. This creates a strict pre-award gate: contracting officers are prohibited from awarding, modifying, or exercising options on covered contracts unless the contractor maintains an "eligible" status in NISS.

While the proposed rule explicitly exempts contracts at or below the Simplified Acquisition Threshold ($350,000), the exemption for commercial products and services comes with a major caveat. The DOW may still apply these stringent FOCI requirements to commercial and off-the-shelf contracts if a designated official determines the acquisition presents a national security risk involving sensitive data or systems.

STRATEGIC ACTION PLAN FOR YOUR BUSINESS

As your advisor, I consider this proposed rule one of the most operationally impactful supply chain shifts for unclassified contractors in recent years. With public comments due by July 6, 2026, you must begin compliance preparations now to avoid being locked out of future awards. Here is your action plan:

• Audit Your Ownership and Register in NISS: Do not wait until you are the apparent successful offeror to realize you cannot access the system. Identify all of your company's beneficial owners and foreign stakeholders now, confirm you have the necessary access to NISS, and familiarize your security officer with the SF 328.
• Update Your Subcontracting Policies: Because this rule would require flow-down to all subcontracts exceeding $5 million, prime contractors would become responsible for confirming their subcontractors' NISS eligibility prior to award and throughout the life of the contract. You must be prepared to update your vendor onboarding procedures and standard subcontract templates to ensure your teaming partners are compliant if this rule is finalized.
• Re-evaluate M&A and Private Equity Capital: If your small business is currently seeking private equity investment, recapitalization, or contemplating a merger, you must explicitly evaluate whether the transaction involves foreign ownership (directly or indirectly at 5% or more). A sudden change in beneficial ownership mid-performance would require reporting within three business days and could trigger mandatory mitigation plans or put your current contracts at risk.
• Submit Public Comments: If this rule will severely bottleneck your operations or impose unmanageable administrative costs, use the public comment period ending July 6, 2026, to make your voice heard and help shape a more practical final rule.

Credits & Further Reading: This analysis relies on the Holland & Knight Alert authored by Robert A. Friedman, Chris Nagel, Andrew K. McAllister, Nathan Mitchell, Anna Vizniak, Molly B. O'Casey, and Marina Veljanovska O'Brien.

• Read the full Holland & Knight analysis here: Got It Covered? Expanded FOCI Oversight for Contractors and Subcontractors