Under the SBA affiliation rules, there is no broad exception from affiliation with a non-profit, according to a recent SBA Office of Hearings and Appeals decision.
In Size Appeal of Asklepion Pharmaceuticals, LLC, SBA No. SIZ-5410 (2012), SBA OHA held that the SBA Area Office properly found a company affiliated with several non-profits, causing the company to be ineligible as a small business.
The Asklepion SBA size appeal decision involved a Health & Human Services request that the SBA determine the size status of Asklepion Pharmaceuticals, LLC with respect to the review of a new drug application. (If Asklepion was a small business, it would be eligible for a deferral and reduction of a fee owed to HHS).
In its initial response to the SBA, Asklepion stated that it was owned by the South Pacific Division of the Seventh-Day Adventist Church. Asklepion also identified a number of other entities with which it claimed to be affiliated.
Asklepion admitted that, together with its affiliates, it exceeded the applicable 500-employee size standard. However, Asklepion argued that the Seventh-Day Adventist Church and the other entities with which Asklepion admitted affiliation were exempt under 13 C.F.R. § 121.103(b)(5)(iv) because they were non-profits. According to Asklepion, that regulation provides that non-profits are exempted from being found affiliates of a company undergoing a SBA size review.
The SBA Area Office issued a size determination finding Asklepion to be ineligible as a small business. According to the SBA Area Office, the regulatory provision cited by Asklepion applies only in the limited circumstance of when a small business seeks assistance under the Small Business Investment Act of 1958.
After receiving the size determination, Asklepion apparently changed its mind about its own original interpretation of the SBA affiliation rules. Asklepion filed a SBA size appeal, this time asserting that it was not affiliated with the Seventh-Day Adventist Church and the other entities named as affiliates in its initial response to the SBA.
SBA OHA rejected Asklepion’s arguments. Addressing Asklepion’s original “non-profit” contention, SBA OHA confirmed the SBA Area Office’s interpretation of 13 C.F.R. § 121.103(b)(5)(iv). SBA OHA wrote that Asklepion “misread the regulation, which only applies this exemption to affiliation coverage in the case of firms seeking assistance under the Small Business Investment Act of 1958.”
SBA OHA also turned down Asklepion’s attempt to reverse its original position on its affiliations. SBA OHA stated that Asklepion “claimed affiliation with the entities identified in its submission to the Area Office, and the Seventh Day Adventist Church in the South Pacific, and it cannot now disclaim this affiliation.” SBA OHA denied Asklepion’s appeal.
The Asklepion Pharmaceuticals SBA size appeal decision is an important reminder that except in the case of firms seeking assistance under the Small Business Investment Act of 1958, just because an entity is a non-profit does not mean that it cannot be an affiliate. Small government contractors should take note.