The SBA’s “Common Investments” Affiliation Rule: A SBA OHA Primer

“Common investments” affiliation under the SBA affiliation rules can occur when the SBA believes that two individuals’ common investments in multiple companies will cause the individuals in question to act with a common purpose.

A recent SBA OHA size appeal decision shows how the common investments rule can work in practice–in this case, resulting in the business in question being deemed affiliated with several other companies.

SBA OHA’s decision in Size Appeal of Seacon Phoenix, LLC, SBA No. SIZ-5523 (2013) involved a Navy solicitation for outboard submarine and surface ship connector and receptacle assemblies.  The solicitation contained a number of Contract Line Item Numbers set-aside for small businesses.

After reviewing competitive proposals, the Navy announced that Seacon Phoenix, LLC was the apparent successful offeror.  After dismissing a competitor’s protest for lack of specificity, the SBA Area Director initiated her own size protest against Seacon Phoenix.

The SBA Area Office determined that six individuals owned interests in Seacon Phoenix.  Patrick Simar, Denton Seilhan, and Frank Ravenelle each owned 25%.  Three other individuals owned the remaining 25%.

Mr. Simar and Mr. Seilhan jointly owned 100% of seven other companies, six of which had “Seacon” in their names.  Mr. Simar and Mr. Seilhan also collectively owned a 50% stake in an eighth company.

Based on these common investments, the SBA Area Office determined that Mr. Simar and Mr. Seilhan had an identity of interest, and would be treated as one party for purposes of the size determination.  As a result, the SBA Area Office found that Mr. Simar and Mr. Seilhan, jointly, controlled Seacon Phoenix by virtue of their collective 50% ownership interest.  The Area Office determined that Seacon Phoenix was affiliated with the other companies owned by Mr. Simar and Mr. Seilhan.  Because of the affiliations, Seacon Phoenix was found to be ineligible for award.

Seacon Phoenix filed a size appeal with SBA OHA, arguing that the SBA Area Office had erred in its size determination.  SBA OHA disagreed.

SBA OHA wrote that under the common investments affiliation rule, “although an individual owner may not have the ability to control a firm based on his individual ownership interest, multiple owners may have the collective ability to control based on their aggregated interests.”  In this case, SBA OHA wrote, “[t]he record supports the Area Office’s finding that Messrs. Simar and Seilhan have significant ownership interests in a multitude of companies, many of which they own exclusively.”  SBA OHA concluded, “[t]his level of common investment clearly bespeaks a common purpose, such that a finding of identity of interest is appropriate.”  SBA OHA denied the size appeal.

Unlike some of the SBA affiliation rules, common investments affiliation is not necessarily intuitive.  Many small business owners are surprised to learn that two individuals’ common ownership of multiple companies can cause the SBA to treat the individuals as one party for size purposes, which–as in Seacon Phoenix’s case–may result in affiliation with other businesses controlled by those individuals.

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