SBA expands small business pool with new rule change | PLC Bass, Berry & Sims

On June 6, the U.S. Small Business Administration (SBA) issued a final rule changing its methodology for calculating small business size using an employee-based size standard and allows businesses participating in its loans to business, disaster loans, surety and small Business Investment Company (SBIC) programs allow the option to choose to use a three- or five-year revenue average to determine eligibility. The final rule will come into effect on July 6, 2022.

First, the rule, amending 13 CFR § 121.106, increases the calculation period for employee-based height standards from 12 months to an average of 24 months and applies to all SBA small business and socio-economic programs. . The change implements Section 863 of the National Defense Authorization Act (NDAA) of 2021, amending Section 3(a)(2)(C)(ii)(I) of the Small Business Act.

Notably, the rule will not provide a transition period during which companies can choose to calculate their size using the 12-month or 24-month period, as allowed by the SBA with the implementation of the Small Business Runway. Extension Act of 2018 (SBREA). The SBA argues that a transition period is not necessary at this stage of the economic recovery, as employment “returns to pre-pandemic levels.”

The SBA believes the rule will allow businesses “to better adjust to short- and medium-term increases in employment” and deliver its programs to an increased number of beneficiaries enabling the small business community and the economy in general to better recover from the COVID-19 pandemic. In addition, “the SBA [expects] 24-month employee average is lower than the 12-month average for most companies,” resulting in 435 companies “extending or regaining” status and approximately $158 million in additional contracts given to small businesses.

Some commentators have expressed concern that the rule would direct more funding to small and medium-sized businesses with the resources to supplant smaller businesses. The SBA pushed back against criticism, arguing that the 24-month average period is a better overall measure of company size and that the new assessment period provides a “broader track.” [for businesses] to grow and become competitive for federal opportunities. In addition, the SBA anticipates that the expanded pool of potential recipients will prompt the federal government to reserve more contracts for small businesses.

Second, the new rule changes the rules for calculating the size of businesses participating in the SBA’s business loan, disaster loan, bonding, and small business investment (SBIC) programs. When the SBA implemented SBREA, the agency changed its receipt-based size standards for everything except its business and disaster loan programs. The new rule extends these changes to the programs mentioned above, allowing companies to choose to calculate their average annual revenue using a three-year or five-year average.

The SBA hopes that choosing the average will result in more companies being eligible to benefit from the agency’s programs. For example, businesses that recently lost eligibility may regain status, and growing businesses will most likely be able to continue to benefit from SBA programs.

The rules and regulations regarding eligibility for SBA programs are numerous and can be confusing. Misrepresentation of size standards can lead to a ban from competing on specific contracts, criminal investigations and fines. The Defense Criminal Investigations Office of the Inspector General of the Department of Defense has made investigating cases of misrepresentation an agency priority. As we discussed in a previous blog post, after obtaining credible evidence of violations due to distorted size standards, government contractors are required to disclose such violations in writing. It is essential that businesses follow and understand the relevant SBA rules before certifying as a small business.

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