SBA and Congress Tussle Over Small Business Runway Extension Act Effective Date, as SBA Issues Proposed Rule

On June 24, 2019, the Small Business Administration (SBA) issued a long-awaited proposed rule setting out its proposed implementation of the Small Business Runway Extension Act (the Act), which we discussed in a prior Advisory.¹ When finalized, the rule will extend the SBA's period for measurement of a contractor's size status from three to five years, as prescribed by Congress when it passed the Act in December 2018.

The SBA and the House of Representatives Committee on Small Business sharply disagree on the effective date of the Act. Shortly after passage of the Act, SBA issued an Information Notice, opining that the Act's provisions would not be effective until SBA completed its rulemaking process. At a March 26, 2019 hearing, and via a subsequent May 1, 2019 press release, members of the House Committee complained that since the Act's passage, "the Small Business Administration has postponed its implementation, creating confusion and challenges for small businesses competing for federal contracts."² Accordingly, on June 13, 2019, the House amended the Act to "clarify the intention of Congress," specifically that, "the Small Business Runway Extension Act of 2018 has been effective since the date it was signed into law, on December 17, 2018."³

Based on the text of the rule, SBA has elected not to follow the House's directive. In the rule, the SBA doubles down on its previously articulated position that the Act is not yet in effect. SBA states that its proposed rule would only affect the application of SBA's size standard rules "after the effective date of a final rule. Thus, until the effective date of a final rule, SBA will continue to apply the 3-year averaging period in the present § 121.104 for calculating annual average receipts for all SBA's receipts-based size standards."

In the rule, SBA also clarified that the change will not be implemented retroactively because "size is determined when a firm certifies its size as part of its initial offer," so "SBA will still use a 3-year calculation period if the determination or appeal relates to a certification submitted prior to the final rule's effective date."

Finally, SBA explained that annual receipts calculated in connection with the sale or acquisition of a division count in calculating size status, but the receipts of a subsidiary do not.

SBA requests feedback on two points of the rule. First, SBA asks whether SBA should calculate annual average receipts over five years for all industries subject to receipts-based size standards or only for businesses in services industries and otherwise continue using a three-year annual average for non-services businesses. Second, SBA invites comments on how the rule would impact "smaller small businesses." SBA is apparently asking contractors whether allowing larger small businesses to retain their status for a longer period would be significantly detrimental to "smaller small businesses."

Despite the SBA's proposal to withhold implementation of the Act during the rulemaking period, this rule ultimately represents a substantial change for many small businesses that will extend eligibility for many contractors that would otherwise have "graduated" beyond small business status. Comments on the rule are due on or before August 23, 2019.

© Arnold & Porter Kaye Scholer LLP 2019 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.