By Taimur Rabbani, Esq and Andrew Campbell
On December 17, 2018, the Small Business Runway Extension Act of 2018 (Runway Extension Act) was signed into law. The law was designed to change how certain companies evaluated their historical revenues when determining whether or not they qualified as a small business. The SBA to date has not implemented regulations to enact the legislation, and has not adopted the methodology set forth in the Runway Extension Act. Small business contractors (and companies that may otherwise qualify as small businesses) are increasingly concerned about ambiguity on how to evaluate their size.
What is the Small Business Runway Extension Act of 2018?
The Runway Extension Act had a single purpose: to strike the three-year annual average gross receipts size standard and insert a five-year standard in § 3(a)(2)(C)(ii)(II) of the Small Business Act. In other words, the revenue-based size standard applicable to the business is now supposed to account for an additional two years of historical information, in order to determine whether a business qualifies as small.
According to House Report 115-939, which accompanied the Runway Extension Act, the purpose of the legislation “is to help advanced-small contractors successfully navigate the middle market as they reach the upper limits of their small size standard.” In essence, this legislation aims to diminish the impact of any rapid-growth year or year with disproportionate revenue that would otherwise disqualify a business from being classified as ‘small,’ and it seeks to help businesses who might otherwise outgrow their size status by giving more time to develop their competitiveness before losing their small business status.
The legislation may have some unintentional adverse impacts for certain businesses. For example, smaller small businesses may be adversely impacted as their larger small business competitors may maintain their small business status longer. Conversely, a larger small business that has decreased in size may be precluded from small business status for an extended period, as the new rule would consider annual receipts from presumptively more profitable years prior to its decrease in size.
SBA’s Position on the Runway Extension Act
In addition, this new five-year standard may pose complications and create ambiguity for some businesses, because the SBA is maintaining its same, preexisting method for calculating annual receipts (C.F.R. § 121.104) along with the same size standards per NAICS code (C.F.R. § 121.201).
Although the Runway Extension Act has been signed into law, SBA has issued Information Notice No. 6000-180022 asserting that due to lack of an effective date in the Act, the five-year standard is not in effect. Moreover, SBA contends, citing their rule-making authority in 15 U.S.C. § 632(a)(2)(A), that new size standards must be approved by SBA. Therefore, the SBA has taken the position that until it promulgates a regulation to implement a five-year standard, the prior three-year standard will remain in effect.
Whether or not small business contractors should use the three- or five-year standard is a considerable source of confusion around the Runway Extension Act. In response to SBA’s position, House Committee on Small Business’s memorandum stated, citing Supreme Court authority, that SBA has misinterpreted the law as court’s have historically held that if a law does not provide an effective date, it is to go into effect immediately. The memorandum also states that “courts have held that statute supersedes regulation.”
Certain companies may follow the House Committee’s position and justifiably assert small business status, in contravention of the SBA’s position. Until the SBA enacts regulations to implement the Runway Extension Act there remains ambiguity and uncertainty for small (and potentially small) businesses, and the SBA also risks circumventing legislative authority by maintaining the three-year standard.
O’Riordan Bethel helps businesses of all sizes determine their eligibility to participate in government contracting certification programs. We help companies navigate the federal contracting process at all stages of their life cycle, from formation, certification, and through graduation as a small business. Please contact one of our attorneys to see how we may be able to assist you.