The Small Business Administration (SBA) has released a proposed rule that would significantly alter a number of SBA small business program regulations, including those governing size recertifications. While we are not commenting on all the changes proposed in this rulemaking, we are noting some that will likely have far-reaching consequences for small businesses seeking capital infusion and/or third parties looking to invest in these contractors.
Generally, an offeror's size status for award eligibility purposes is determined at the time of initial offer (including price), and a contractor maintains its size and status for the life of a contract, including any orders thereunder. The Government Accountability Office (GAO) and SBA Office of Hearings and Appeals (OHA) have interpreted SBA's regulations to include certain exceptions to this rule in recent years. The proposed rule states that "SBA believes both GAO and OHA misinterpret SBA's regulations," and SBA proposing the instant rule to, among many other changes, clarify that there are only three exceptions to this general rule.
Before jumping into the three exceptions to the general rule, as a matter of housekeeping, the SBA is proposing to consolidate what has become a patchwork of regulations implementing size recertification requirements from the program-specific parts under Title 13 into a new uniform set of rules at 13 C.F.R. 125.12.
With respect to the three exceptions to the general rule, the proposal rule provides as follows:
- Whenever a size recertification is triggered pursuant to any scenario outlined in the proposed regulation at 13 C.F.R. 125.12 (i.e., a "triggering event"), the date to determine size will be the date of the triggering event. Triggering events include several of those currently set forth in the SBA rules—an approved novation, merger, acquisition, or sale of or by a concern or an affiliate of the concern, which results in a change in controlling interest —but now also including agreements in principle.
If the concern can no longer certify as small following a triggering event, this "disqualifying recertification" renders the concern ineligible for any further set-aside orders or options under a multiple award contract (MAC). However, the concern remains eligible for unrestricted orders issued under MACs and orders issued under single award set-aside contracts, as well as options under single award set-aside awards and unrestricted awards.
Alternatively, if the contracting officer has requested recertification with an offer, size is determined on the date of initial offer for the particular order or agreement that the recertification was sought for. If a concern has a disqualifying recertification in response to a contracting officer's request for recertification on a specific order or agreement, the concern is ineligible for the specific order or agreement but remains eligible for other set-aside and unrestricted awards.
- For set-aside orders or agreements placed against a General Services Administration Federal Supply Schedule (FSS) contract, there is currently an exception providing that size status is determined as of the date of the offer for the underlying FSS contract. However, the proposed rule eliminates this exception. Under the proposed rule: (1) if a triggering event for recertification occurs (such as a merger, sale, or acquisition), size is determined as of the date of the triggering event, or (2) if the contracting officer requests recertification for a set-aside order or agreement, size is determined as of the offer date for the order or agreement. In both circumstances, the concern is no longer eligible for set-aside orders or agreements against the FSS contract.
- For 8(a) sole-source awards issued against MACs, the concern must qualify as small as of the date of the initial offer for and award of the order or agreement, regardless of whether the underlying MAC is unrestricted, set-aside, or under an FSS contract.
There are several ramifications of these changes, including, for example, the following:
- This proposed rule, if finalized, would significantly alter concerns' eligibility for future task orders and options following triggering events and recertification. Currently, contractors that are subject to a merger or acquisition maintain their size and status for the life of a contract, including any orders thereunder, unless specifically called upon to recertify. Under this new rule, contractors under MACs will be limited and potentially completely restricted from doing future business on MACs where they originally represented themselves as "small."
- The inclusion of agreements in principle in the definition of a "triggering event," which can include letters of intent and other preliminary transaction-related agreements, could be construed in such a manner as to cause a small business to become affiliated immediately, thereby rendering them ineligible for certain contracts or orders before they are actually part of another organization. This also raises questions as to when and how a small business contractor might regain its status if the deal falls through.
Not surprisingly, these and other possible concerns stemming from this rule may impact parties considering a capital infusion through a merger, acquisition, or sale of a small business if the transaction would trigger a disqualifying recertification and render the concern ineligible for future orders and options. Given this, we advise our small business clients and those who may invest in such to review the rule closely and consider commenting. Comments on the proposed rule are due by October 7, 2024.
