When the SBA issued its final rule implementing the Runway Extension Act’s 5-year receipts calculation period earlier this month, it allowed for a two-year transition: until January 6, 2022, the SBA will allow businesses to choose either a 3-year or a 5-year receipts calculation period.
This transition phase is helpful, the SBA noted, to small businesses that might be adversely affected by an abrupt change to the receipts calculation period—namely, businesses with declining revenues over the preceding five years that are nonetheless close to the applicable size standard cap.
SBA’s accommodation of these companies is, by any measure, a commonsense solution to prevent inadvertent harm caused by the Runway Extension Act. But notwithstanding this laudable policy objective, is the new transition period legal?
To understand the legality of the transition period, let’s review the statutory authority under which size standards are issued.
The Small Business Act (as amended by the Runway Extension Act) now says, in pertinent part, that “no Federal department or agency may prescribe a size standard for categorizing a business concern as a small business concern, unless such size standard provides for determining the size of a business concern providing services on the basis of the concern’s annual average gross receipts of the business concern over a period of not less than 5 years.” 15 U.S.C. § 632(a)(2)(C) (cleaned up).
In other words, the Act prohibits any “Federal department or agency” from prescribing a receipts-based size standard with a calculation period of less than 5 years.
So is the new transition period legal? That depends on the definition of “prescribe.” If “prescribe a size standard,” as used in the Small Business Act, means to “create a new size standard,” the transition period probably complies with the Act. But if it instead means something else—like to establish rules under which size is determined—then the transition period violates the Small Business Act’s prohibition against calculation periods of under 5 years.
On this question, the SBA’s Office of Hearings and Appeals’ prior decision in Cypher Analytics, Inc. dba Crown Point Systems, SBA No. SIZ-6022 (Aug. 27, 2019) is instructive. Ruling that the 5-year receipts calculation period was not immediately effective, the OHA said that the amended portion of the Small Business Act “relat[es] to the establishment of size standards” and “not the methodology used to calculate the size of a particular business.” Under this rationale, the OHA would likely determine that “prescribe a size standard” means to establish a new one. Thus, the receipts calculation transition period appears to be legal.
Remember, the 5-year calculation period goes into effect January 6, 2020, and the transition period runs until January 6, 2022.
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